Foundations of Financial Management 10th Canadian edition Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta - Solutions

Northern Airlines is about to go public. It currently has aftertax earnings of $6,000,000 and 4,000,000 shares are owned by the present shareholders. The new public issue will represent 300,000 new shares. The new shares will be priced to the public at $18 per share, with a 4 percent spread on the
I.B. Michaels has a chance to participate in a new public offering by Hi-Tech Microcomputers. His broker informs him demand for the 500,000 shares to be issued is very strong. His broker's firm is assigned 15,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.5
The management of Webster Labs decided to go private in 2003 by buying all 3 million outstanding shares at $18.50 per share. By 2005, management had restructured the company by selling the petroleum research division for $16 million, the fibre technology division for $9.5 million, and the synthetic
The trustee in the bankruptcy settlement for Immobile Homes lists the following book values and liquidation values for the assets of the corporation. Liabilities and shareholders' claims are also shown.a. Compute the difference between the liquidation value of the assets and the liabilities.b.
The Garland Corporation has a bond outstanding with a $90 annual interest with semiannual payment, a market price of $820, and a maturity date in 10 years. Find the following:a. The coupon rate.b. The current yield.c. The yield to maturity.d. The yield an investor would realize if coupon payments
Leland Industries is the country's fifth-largest producer of bakery and snack goods, with operations primarily located in central Canada. Over the last 10 years, Leland had been one of the most efficient bakeries in the country, with a 10-year average sales growth of 9.8 percent and an average
Gina Thomas was concerned about the effect that high interest expenses were having on the bottom-line reported profits of Warner Motor Oil Co. Since joining the company three years ago as vice-president of finance, she noticed that operating profits appeared to be improving each year, but that
Preston Corporation has a bond outstanding with a $70 annual interest with a semiannual coupon payment, a market price of $1,068, and a maturity date in 7 years. Find the following:a. The coupon yield.b. The current yield.c. The yield to maturity.d. The yield an investor would realize if coupon
Myra Breck must choose between two bonds:Bond A pays $100 annual interest with semiannual payment and has a market value of $800. It has 10 years to maturity. Bond B pays $100 annual interest with semiannual payment and has a market value of $900. It has 2 years to maturity.a. Compute the current
Bill Board must choose between two bonds:Bond A pays $90 annual interest with semiannual payment and has a market value of $850. It has 10 years to maturity. Bond B pays $80 annual interest with semiannual payment and has a market value of $900. It has 2 years to maturity.a. Compute the current
Match the yield to maturity in column 2 with the appropriate debt security in column 1.(1) ..........................................(2)Debenture .............................6.85%Secured debt ........................8.20%Subordinated debenture .......7.76%
Millennium Bonds were sold in 2010 with a 10 percent, 25-year maturity, $1,000 par value, and a floating- rate covenant. If rates on similar risk bonds are currently (2016) yielding 7 percent, what is your estimate as to the bond's value?
A $1,000 par value bond was issued 15 years ago at a 14 percent coupon rate, paid semiannually. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 8 percent.a. What is the current price of the bond?b. Assume Igor Sharp bought the bond three years
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 current price of the bond using an assumption of semiannual payments.b. If Mr. Mitchell
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 declined to 7.5 percent. The bonds were originally issued for 20 years and have 16 years remaining.
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 vice-president of finance , does not expect rates to fall any further.The bonds have 18 years left to maturity,
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 were issued at a coupon rate of 10.25 percent seven years ago. Interest rates have fallen to 9
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 maturity. Currently, similar risk bonds are yielding 9 percent over a 15-year period, and Providence is
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 issue would require $500,000 for flotation costs, and the existing issue has written off all its
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 present at an 8 percent annual discount rate.The estimated fair value of the property is $290,000.
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 should the lease payments be?b. If the Hegan Corporation is able to generate $130,000 in immediate tax
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 (salvage) value is estimated to be $11,000. Seven years is the time horizon for analysis.The owner of
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. The machine would cost $250,000. In five years the machine would have an estimated salvage value of
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 price at 9 percent per annum payable in equal instalments at the end of each year over the five
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 bonds have a 20-year maturity. Using an assumption of semiannual interest payments,a. Compute the price
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 $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow
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 been downgraded to A. Determine the new price of the bonds, assuming a 15-year maturity and
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 yielding 8 percent (semiannual compounding).Determine the price of a Polly Cracker bond.
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 of a percentage point higher than previously issued industrial bonds of equal quality. Finally, new
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 would be the value of the strip bond?c. If immediately upon issue, interest rates increased to 10
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 suggest is the spread above Government of Canada bonds for a short-term (2020) bond of TransAlta at
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 state of affairs has not been as successful. The new vice-president of finance is reviewing some
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 rate of 10 percent on the par value. Current market yields on Webber preferreds are estimated to be 7
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 million in annual capital lease obligations over the next 20 years.a. Discount these annual lease
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 borrow funds for four years at 12 percent interest. The asset will qualify for a 25 percent CCA.
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 beginning of the year. The truck, which has a useful economic life of six years, cost Koss $60,000. Its
Andre Weather by, an aspiring artist, had just sold his fifth painting of the year and now had $5,000 in cash to invest. His first inclination was to place his money in a CDIC insured savings account, but he was disappointed to find out that his annual return would be less than 2 percent.Knowing
Giffen Forest Products has sold lumber to the British company Bulldog Builders, with payment due six months from today. The payment due is £155,000. The Canadian dollar and British pound rate is 1.5875 and the six-month C$/£ forward rate is 1.5683. Hedge this liability with a forward contract.
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 March, and the cash price for canola is C$590 per tonne. The settle price on a futures contract to sell
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 price fluctuations through NYMEX/COMEX. Today's (March) price of gold is US$1,882 per ounce. The settle
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 speculative premium on the call option of each company.b. Calculate the intrinsic value and the speculative
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 selling for $1,118.50.a. What is the conversion value of the bond?b. What is the conversion premium?c.
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 convertible bond is selling for $980.a. What is the conversion value of the bond?b. What is 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 rates decline?
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 bonds?
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 in 10 years and carries a coupon rate of 6.5 percent. The conversion ratio is 25, and the common
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 price is $50, and the company's common stock is selling for $44 per share. Interest is paid
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 the Hamilton Steel Company bonds have the same coupon rate of 8 percent as described in the previous
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 announces that it is going to call the bonds at $1,080, what action are bondholders likely to take
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 at a conversion premium of $70 over their conversion value.If the price of the common shares rises to
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 is rated pfd-2, and competitive nonconvertible preferreds of the same risk class carry an 8 percent
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 warrant is selling for $12.25 per share.a. What is the intrinsic (minimum) value of this warrant?b.
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 $6.a. What is the intrinsic (minimum) value of this warrant?b. What is the speculative premium on
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 cost of $10.00. Sleepless Night shares currently trade in the market for $16.25 each. What is the
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) value of the warrant?b. What is the speculative premium on the warrant?c. If the stock rises to
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 for the warrant purchaser to at least be assured to breaking even?
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 there is no speculative premium left). Cable Corp. common stock is selling today for $60 per
Assume in the previous problem that Cable Corp. common stock was selling for $50 per share when the Manning Investment Company bought the warrants.a. What was the intrinsic (minimum) value of a warrant at that time?b. What was the speculative premium per warrant when the warrants were purchased?c.
Meyers Business Systems has two million shares of stock outstanding. It also has two convertible bond issues outstanding with terms as follows:The issue with the 9 percent coupon rate was first sold when average A bonds were yielding 12 percent, and it is convertible into 300,000 shares. The issue
Suggest synergy that might occur in mergers in the financial services or in the energy sectors.
The following spot and forward rates for the euro ($feura) were reported:Spot ............... .........1.632730-day forward.........1.632690-day forward.........1.6326180-day forward.......1.6333a. Was the euro selling at a discount or premium in the forward market?b. What was the 30-day forward
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 Egyptian pounds are equal to a Jordanian dinar?
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 pesos are equal to a Brazilian real?
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 baht are equal to the Panamanian balboa?
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 in 2014?
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 vice-president of finance at Nickel Plains suggests that the spot rate in three months' time will be 1.3333.
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 eurosb. 2,000 rupeesc. 100,000 yend. 5,000 Swiss francse. 20,000 Swedish kronaf. 50,000 baht October 2008
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 at Royal Minty suggests that the spot rate in six months time will be 1.7915.Interest rates in
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 one year for 1 million euros. There is some concern over the value of the euro in one year, as the
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. Campbell's subsidiary repatriates the entire aftertax profit in the form of dividends to the parent
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 25 years. There is no tax loss carry forward.The cost of capital for the acquiring firm is 9
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 20 years. There is no tax loss carry forward.The cost of capital for the acquiring firm is 12
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 much will the total taxes of Arrow Corporation be reduced as a result of the tax loss
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 carry-forward that could be used immediately by the Wayne Corporation, which is paying taxes at the
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 in Calgary to finance the acquisition of an oil producing property in Oklahoma. The loan will also
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. dollar versus the Canadian dollar, what will be the total percentage return to the Canadian
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 will be the total percentage return to the French investor?b. Now assume the stock increases by $10
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 year, but the New Zealand dollar depreciated 3 cents against the Canadian dollar during the time
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 Technology for $40 a share. His marginal tax rate would be 28 percent.a. If he sells his interest,
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 percent over market price, what will be the offered share price for Flight Simulators?b. Suppose
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 postrnerger EPS be?b. If Mickey Corporation pays a 25 percent premium over the market value of Minnie
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 merger. Will the postrnerger earnings go up or down, based on your calculations?Data from previous
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 the earnings will decrease from $1.89 to $1.20 with the merger because the two firms are negatively

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Foundations of Financial Management 10th Canadian edition Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta - Solutions

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