Questions and Answers of Foundations Financial Management

A $1,000 par value bond was issued 25 years ago at an 8 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar debt obligations are now 14 percent.a. Compute
The Wagner Corporation has a $20 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 9 percent, the interest rates on similar issues have
The Harding Corporation has $50 million of bonds outstanding that were issued at a coupon rate of 10.25 percent seven years ago. Interest rates have fallen to 9 percent.Preston Alter, the
In the previous problem, what would be the aftertax cost of the call premium at the end of year 13 (in dollar value)?Previous ProblemThe Harding Corporation has $50 million of bonds outstanding that
Providence Industries has an outstanding debenture of $25 million that was issued when flotation costs could be expense immediately. It carries a coupon rate of 10 percent and has 15 years to
United Brits Ltd. has a bond outstanding that carries a 10 percent coupon rate paid annually. Current bond yields are 7.5 percent. It has $30 million outstanding and 12 years left to maturity. A new
In the lease-versus-purchase decision, why is the discount rate the aftertax cost of debt?
The Richmond Corporation has just signed a 144-month lease on an asset with an 18-year life. The minimum lease payments are $3,000 per month ($36,000 per year) and are to be discounted back to the
The Hegan Corporation plans to lease a $900,000 asset to the Do by Corporation. The lease will be for 10 years.a. If the Hegan Corporation desires a 10 percent return on its investment, how much
Kumquat Farms Ltd. has decided to acquire a kumquat picking machine. The cost of the picking machine is $45,000, and it has an economic life of 10 years. At the end of seven years, the market
C.T. All Ltd., a manufacturer of customized baseball souviners, is negotiating with the Grand Slam Company to purchase or to lease a machine that produces foam cushions for seating at baseball parks.
Orwell Futures has decided to acquire a travelling machine. Its cost is $75,000. In five years it can be salvaged for $25,000. Friendly Loansharks has agreed to advance funds for the entire purchase
Explain why warrants generally are issued and why they are used in corporate finance.
The Milken Investment Fund buys 90 bonds of the Levine Corporation through its broker. The bonds pay 11 percent annual interest. The yield to maturity (market rate of interest) is 14 percent. The
Pacific Western Corporation pays a 12 percent coupon rate on debentures due in 25 years. The current yield to maturity on bonds of similar risk is 10 percent. The bonds are currently callable at
The yield to maturity for 15-year bonds is as follows for four different bond rating categories.The bonds of Falter Corporation were rated as AA and issued at par a few weeks ago.The bonds have just
The 20-year A-rated bonds of Polly Cracker Company were initially issued at a 10 percent yield (paid semiannually). After 5 years, the bonds have been upgraded to AA. Such bonds are currently
A previously issued, A-rated 20-year industrial bond provides a return one-fourth higher than the prime interest rate of 9 percent. Previously issued public utility bonds provide a yield of one-half
A 10-year, $1,000 par value strip bond is to be issued to yield 8 percent.a. What should be the initial price of the bond?b. If immediately upon issue, interest rates dropped to 6 percent, what
What is the effective yield to maturity on a strip bond that sells for $131 and will mature in 30 years?
Use Table 16-3 to answer the following questions.Table 16-3a. Why would the TransCanada Pipeline 4.55 percent bond have a higher yield to maturity than the Trans Alta 5.00 percent bond?b. What do you
Daedulus Wings has had several successful years in the airline business and had received recognition from many quarters for flying higher, further, and cheaper than the competition. Its financial
Webber Musicals Corporation is considering replacing its $2 million preferred share issue because market yields have declined. The existing preferreds carry a dividend of $5 per share, which is a
The Ellis Corporation has heavy lease commitments. A new vice-president wants the lease obligations footnoted in the balance sheet as follows:The footnotes would state that the company had $10
Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $10,000. It can
Koss Leasing requires a 14 percent return on its investments. It is prepared to lease you a truck for two years, provided that it can achieve this return. The lease payments are to be made at the
Andre Weather by, an aspiring artist, had just sold his fifth painting of the year and now had $5,000 in cash to invest. His first inclination was to place his money in a CDIC insured savings
Giffen Forest Products has sold lumber to the British company Bulldog Builders, with payment due six months from today. The payment due is £155,000. The Canadian dollar and British pound rate is
You farm in Alberta and expect to have 1,000 tonnes of canolafor sale in the fall. You would like to hedge your risk of price fluctuations through the Winnipeg Commodity Exchange. Today is early
You manufacture gold jewellery for sale to local retail outlets. This upcoming fall you will require 500 troy ounces of gold (1 troy ounce= 31.103 grams) and you would like to hedge your risk of
The following companies' shares and options trade at the identified prices. The options have a July expiry and the identified strike prices.a. Calculate the intrinsic (minimum) value and the
Why, in the case of a convertible preferred share, are investors willing to pay a premium over the theoretical value (pure preferred value or conversion value)?
DNA Labs Inc. has a $1,000 convertible bond outstanding that can be converted into 40 shares of common stock. The common stock is currently selling for $26.75 a share, and the convertible bond is
Claypot Ceramics Company has a $1,000 par value convertible bond outstanding that can be converted into 100 shares of common stock. The common stock is currently selling for $8.95 a share, and the
Find the price of two convertible securities in a newspaper.a. Explain what factors cause their prices to be different from their par values.b. What will happen to their value if long-term interest
The bonds of Stein Co. have a conversion premium of $35. Their conversion price is $20. The common stock price is $18.50. The bond maturity value is $1,000. What is the price of the convertible
Sherwood Forest Products has a convertible bond quoted in the bond market at 95. (Bond quotes represent percentage of par value. Thus, 70 represents $700, 80 represents $800, and so on.) It matures
Which adjustments to aftertax earnings are necessary to compute EPS when convertible preferred shares are outstanding? When warrants are outstanding?
Hamilton Steel Company has a convertible bond outstanding, trading in the marketplace at $930. The par value is $1,000, the coupon rate is 8 percent, and the bond matures in 25 years. The conversion
In the previous problem, if the interest rates on similar bonds, which are not convertible, go up from 10 to 12 percent, what will the new pure bond value be for Hamilton Steel Company bonds? Assume
Why do warrants sell above their intrinsic values?
Which factors determine the size of the speculative premium on a warrant?
Swift Shoe has convertible bonds outstanding that are callable at $1,080. The bonds are convertible into 22 shares of common stock. The stock is currently selling for $59.25 per share.a. If the firm
Investigate and explain put warrants.
Vernon Glass Company has $20 million in 10 percent convertible bonds outstanding.The conversion ratio is 50, the share price is $19, and the bond matures in 10 years.The bonds are currently selling
B.C. Fisheries Ltd. has convertible preferred shares outstanding currently trading at $31.00. The preferreds pay an annual dividend of $2.00 and have a redeemable feature effective in two years. It
Hanson Toy Co. has warrants outstanding that allow the holder to purchase 1.5 shares of stock per warrant at $22 per share (option price). The common stock is currently selling for $28, while the
Spring Fields has warrants outstanding that allow the holder to purchase one common share at $17 per share (option price). The common stock is currently selling for $21. The warrant is selling for
Sleepless Night Ltd.'s warrant is priced at a speculative premium of $3.00 to its intrinsic (minimum) value. Each warrant entitles the holder to purchase one share in Sleepless Night Ltd. for a total
You can buy a warrant for $4.00 that gives you the option to buy one share of common stock at $14.50 per share. The stock is currently selling at $12.00 per share.a. What is the intrinsic (minimum)
The warrants of Slowbus Transportation Corporation allow the holder to buy a share of stock at $17.50 and are selling for $2.75. The share price is currently $15.00. To what price must the share go
The Manning Investment Company bought 100 Cable Corp. warrants one year ago and would like to exercise them today. The warrants were purchased for $30 each, and they expire when trading ends today
Assume in the previous problem that Cable Corp. common stock was selling for $50 per share when the Manning Investment Company bought the warrants.a. What was the intrinsic (minimum) value of a
Meyers Business Systems has two million shares of stock outstanding. It also has two convertible bond issues outstanding with terms as follows:The issue with the 9 percent coupon rate was first sold
Suggest synergy that might occur in mergers in the financial services or in the energy sectors.
The following spot and forward rates for the euro ($feura) were reported:Spot ............... .........1.632730-day forward.........1.632690-day forward.........1.6326180-day forward.......1.6333a.
Suppose an Egyptian pound is selling for $0.2169 and a Jordanian dinar is selling for $1.8932. What is the exchange rate (cross rate) of the Egyptian pound to the Jordanian dinar? That is, how many
Suppose a Mexican peso is selling for $0.1164 and a Brazilian real is selling for $0.4325. What is the exchange rate (cross rate) of the Mexican peso to the Brazilian real? That is, how many Mexican
Suppose a Thai baht is selling for $0.03280 and a Panamanian balboa is selling for $1.3404. What is the exchange rate (cross rate) of the Thai baht to the Panamanian balboa? That is, how many Thai
From the base price level of 100 in 1974, Swiss and Canadian price levels in 2014 stood at 200 and 421, respectively. If the 1974 $/Sf exchange rate was $0.40/Sf, what should the exchange rate be
Nickel Plains of Canada has purchased 500,000 pounds of nickel from Coin Ltd. at US$6.96, payable in 90 days. The current spot rate is 1.3404 (C$/US$) and the 90-day forward is 1.3421. The
Using the foreign exchange rates for July 2014, presented in Table 21-1, determine the number of Canadian dollars required to buy the following amounts of foreign currencies:Table 21-1a. 10,000
Royal Minty of Britain has purchased 20,000 ounces of silver from Silver Products at US$8.30, payable in 180 days. The current spot rate is 1.8127 ($US/£) and the 180-day forward is 1.7863. The CEO
Should multinational firms dictate debt ratio limits and dividend payouts to their foreign affiliates?
Saturn Industries sells its products under a licensing agreement to many parts of the globe. Under the terms of an agreement reached with a German company, a payment for Saturn's services is due in
Campbell Electronics Corporation has a wholly owned foreign subsidiary in Jamaica. The subsidiary earns $5 million per year before taxes in Jamaica. The foreign income tax rate is 20 percent.
McGraw Trucking Company is considering a cash acquisition of Hill Storage Company for $3 million. Hill Storage will provide the following pattern of cash inflows and synergistic benefits for the next
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,000,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next
What are the purchase of assets accounting treatments of a merger? What is the effect of including goodwill?
Assume the Arrow Corporation is considering the acquisition of Failure Unlimited.The latter has a $400,000 tax loss carry-forward. Projected earnings for the Arrow Corporation are as follows:a. How
Is risk reduction in the firm's portfolio of undertakings likely to be best achieved through horizontal integration, vertical integration, or conglomerate-type acquisitions?
The Wayne Corporation desires to expand. It is considering a cash purchase of the Gretz Corporation, a company in a similar business, for $3 million. The Gretz Corporation has a $600,000 tax loss
You are the vice-president of finance for Exploratory Resources, headquartered in Calgary. In January 2012, your firm's American subsidiary obtained a six-month loan of $1 million (U.S.) from a bank
Canadian investor buys 200 shares of Microsoft for $12,200 ($61.00 per share). Over the course of a year, Microsoft shares decline by $3.00.a. If there is a 4 percent gain in the value of the U.S.
A French investor buys 100 shares of Teck for $4500 ($45 per share). Over the course of a year, Teck goes up by $8.65.a. If there is a 10 percent gain in the value of the dollar versus the euro, what
An investor in Canada bought a one-year New Zealand security valued at 146,263 New Zealand dollars. The Canadian dollar equivalent was $100,000. The New Zealand security earned 8 percent during the
Explain how the weak stock market of the late 1970s served as an impetus to the merger wave of the late 1970s and 1980s. Did this happen again in the wake of the 2008---09 financial recession?
What is LIBOR? How does it compare to the Canadian banks' domestic prime rates?
Which factors influence a Canadian business firm to look into expanding in international markets?
Generally, a shareholder of the selling corporation demands a higher price if cash consideration is tendered. Explain why this might be the case.
Dr. Payne helped start Surgical Inc. in 1996. At the time, he purchased 200,000 shares of stock at one dollar per share. In 2012, he has the opportunity to sell his interest in the company to Medical
Explain why unusually high premiums have sometimes been paid in the merger movement.
Lindbergh Airlines is planning to make an offer for Flight Simulators Inc. The shares of Flight Simulators are currently selling for $30 per share.a. If the tender offer is planned at a premium of 60
A merger between Minnie Corporation and Mickey Corporation is under consideration. The financial information for these firms is as follows:a. On a share-for-share exchange basis, what will the
In the case of the Minnie and Mickey merger described in the previous problem, assume a 100 percent premium will be paid and there is a 25 percent synergistic benefit to total earnings from the
How can the ordinary investor benefit from a possible merger? What is the danger of investing in a proposed merger target? Explain.
Assume the Shelton Corporation is considering the acquisition of Cook Inc. The expected EPS for the Shelton Corporation will be $3.00 with or without the merger. However, the standard deviation of
How does a merger ARB benefit from a possible merger? What is the danger in being a merger ARB? Explain.
Wright Aerospace is considering the acquisition of Columbus Shipping Corporation.The book value of the Columbus Shipping Corporation is $30 million, and Wright Aerospace is willing to pay $90 million
Why has the United States been traditionally concerned about corporate concentration arising from merger activity, whereas Canada's concern has been much more with foreign ownership?
Ontario Corporation, a holding company, has investments in three other firms. Values are expressed in millions of dollars.The Ontario Corporation has voting control of the three other corporations
Weese R. Grains of Canada has sold 5,000 tonnes of wheat to Pete's Apasta Company of Italy at 110 euros per tonne and payable in one year. The current spot rate is 1.3805 (C$/euro) and the 1-year
In the previous problem, if Canada had somehow managed no inflation since 1974, what should the exchange rate be in 2014, using the purchasing power parity theory?Data from previous problemFrom the
Compare the use of leverage in a holding company to the concept of operating and financial leverage explained in Chapter 5. Does a holding company have any tax complications related to dividends?
Assume the following financial data for the Wolf Corporation and Lamb Enterprises.a. If all the shares of the Wolf Corporation are exchanged for shares of the Lamb Enterprises on a share-for-share
Briefly discuss three significant features of the merger movement of the past few decades.
The Charles Corporation desires to expand. It is considering a cash purchase of Atlas Enterprises for $2,000,000. The Atlas Corporation has a $600,000 tax loss carry-forward that could be used
It was 5:30 Friday afternoon, January 22, 2016. Bill Hall, the chairman and CEO of National Brands Inc. was clearing up the last of the papers on his desk and was looking forward to a relaxing
Baffin College has an endowment that pays one lucky student $7,500 a year forever; of course, it is a different student each year. Long-term yields are 10 percent.a. How much is currently required to
Allie Reynolds, the chief financial officer of Healthy Products Inc. has been asked to do an evaluation of Fibre Cereal Inc. by the president, Gail Martinez. Healthy Products was planning a joint

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