Questions and Answers of Contemporary Financial Management

What is covered interest arbitrage?L012
Describe two techniques that a company can use to hedge against transaction exchange risk.L012
Describe the factors that cause exchange rates to change over time.L012
What are the advantages to a U.S. firm of financing its foreign investments with funds raised abroad?L012
Describe how the concepts of relative purchasing power parity, interest rate parity, and the international Fisher effect are related.L012
Assume that the annualized discount on forward Canadian dollars is 3 percent.The annualized U.S. interest rate is 8 percent, and the comparable Canadian interest rate is 12 percent. How can a U.S.
Chrysler is planning to sell its new minivan in Japan. Chrysler receives $12,000 for each van sold in the United States and wants to get the same net proceeds from its export sales.a. If the exchange
The annualized yield on 3-year maturity U.S. government bonds is 4 percent, while the yield on similar maturity Swiss bonds is 5 percent. The current spot exchange rate between the dollar and the
Mammouth Mutual Fund of New York has $5 million to invest in certificates of deposit (CDs) for the next six months (180 days). It can buy either a Philadelphia National Bank (PNB) CD with an annual
As of today, the following information is available: L012
Shoesmith Wave, Inc., a new and largely unproven economic forecasting service, expects the inflation rate in South Korea to average 9 percent per year over the next 5 years. In comparison, Shoesmith
The Jennette Corporation, a firm based in Mt. Pleasant, South Carolina, has an account payable with a British firm coming due in 180 days. The payable requires Jennette to pay £200,000. Winthrop
What is the expected dollar cost of the forward hedge? L012
What is the expected dollar cost of the money market hedge? L012
What is the expected dollar cost of remaining unhedged? L012
Which alternative do you recommend? What are the risks associated with this recommendation? L012
On January 1, the cost of borrowing Hong Kong dollars (HKD) for 1 year was 18 percent. During the year the U.S. inflation rate was 2 percent and the Chinese inflation rate was 9 percent. The exchange
The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a model
Using the currency calculator at the following Web site, calculate the foreign currency equivalent of $100 (U.S.) in terms of British pounds, Swiss francs, Canadian dollars, and Japanese yen. Print
Based on the information given in the case and your analysis, what do you feel is a fair exchange ratio?LO1
If Mr. Favorite is unsuccessful in his negotiations with Admiral, two of his key managers, together with a group of private investors, have expressed willingness to take the company private in a
If Admiral Foods is concerned about the possibility that Mr. Favorite will sell his new Admiral shares relatively soon after the merger (and thereby put downward pressure on the price of Admiral’s
In discussions with Admiral, Mr. Favorite has stated that he would prefer to exchange his Favorite shares for either Admiral common stock or a convertible preferred rather than cash or debentures.
Calculate the Admiral Foods postmerger earnings per share, assuming each share of Favorite stock is exchanged for 0.40 shares of Admiral stock.LO1
Even though Harrington’s assignment is primarily financial in nature, what other considerations are important in a merger such as this?LO1
What is the maximum exchange ratio Admiral Foods should agree to if one of its acquisition criteria specifies no initial dilution in earnings per share? What per-share price for Favorite Food Systems
Mr. Favorite has suggested an exchange ratio based on a 25 percent increase over Favorite’s current market price. Calculate this exchange ratio.LO1
Calculate the exchange ratios, based on the common stock market value and earnings per share.
Find a business for sale in each of three major industries of your choice, as listed on the MergerNetwork Website (www.mergernetwork.com) under "Large U.S. Sellers." Then select the "dream" business
Using a search engine, find out how many business bankruptcies occurred in the United States during the last calendar year. Then try to break down these bankrupt- cies by type (retail, restaurant,
NPR MedTech Corporation is considering acquiring IV Pumps, Inc., a relatively small company that manufactures intravenous pumps for use by hospitals. NPR MedTech believes it can grow IV Pump's sales
In problem 11, assume Frank's Superior Carworks has $1.5 million in debt and 500,000 shares outstanding. Based on your answer to problem 11, how much would Jeff's Powerwash be willing to pay for each
Jeff’s Powerwash, Inc., which operates in Texas, is considering acquiring Frank’s Superior Carworks chain of car washes in Maryland. The expected net cash flows from the acquisition for the first
A financial analyst with MTC International has estimated the annual after-tax net cash flow from a proposed merger to be $1.5 million. This cash flow is expected to continue for 10 years. For the
Consider problem 8 again. Assume that there are immediate synergistic benefits of $4 million if Apex and Pinnacle merge. Answer partsa, b, and c of problem 8 under these conditions.LO1
Apex Corporation is considering the purchase of Pinnacle Company in a stockfor-stock exchange. Selected data on the two companies are shown in the following table:Apex Pinnacle Sales (millions) $750
Wilson Industries is considering the acquisition of the Blanchard Company in a stock-for-stock exchange. Selected financial data for the two companies are shown next. An immediate synergistic
Go-for-Broke Company is being liquidated under Chapter 7 of the bankruptcy code.When it filed for bankruptcy, its balance sheet was as follows:Assets Liabilities and Equity Current assets $14,500,000
Consider Failures Galore, Inc. (Tables 23.11 and 23.12).a. If total liquidation proceeds are $5.95 million, what is the distribution of these proceeds among the various creditors of Failures
Looking back at Tables 23.4 and 23.5, assume that Diversified Industries acquires High-Tech Products in a stock-for-stock transaction and no immediate synergistic benefits are expected. How long will
Ball Industries is considering acquiring the Keyes Corporation in a stock-for-stock exchange. Selected financial data on the two companies follow:LO1 Ball Keyes Sales (millions) $600 $75 Earnings
The McPherson Company is considering acquiring the McAlester Company.Selected financial data for the two companies are shown here:McPherson McAlester Sales (millions) $250 $30 Earnings after taxes
The Blue Oil Corporation and the Grey Plastics Company have agreed to a merger.The Grey Plastics stockholders will receive 0.75 shares of Blue for each share of Grey held. Assume that no synergistic
Melissa’s Kitchen, Inc. is considering acquiring Takeshi’s Takeout Corporation, a small local restaurant chain in Denver, Colorado. Expected net cash flows from the acquisition for the first 4
Zenith Industries is considering the acquisition of the Nadir Corporation in a stock-for-stock exchange. (The expression stock-for-stock exchange means that the common stock of one company is
Rank in order of priority (highest to lowest) the following claims on the proceeds from the liquidation of a bankrupt firm: LO1
Explain how a firm that has failed can be reorganized to operate successfully. LO1
In connection with reorganization plans, what do fairness and feasibility mean? LO1
Explain why an informal settlement may be preferable to declaring bankruptcy for both the failing firm and its creditors. LO1
In a debt reorganization, explain the difference between a composition and an extension. LO1
Basically, what determines whether a bankrupt company is reorganized or liquidated? LO1
What alternatives are available to the failing firm? LO1
Explain the differences among the following terms related to financial failure: LO1a. Technical insolvencyb. Legal insolvencyc. Bankruptcy
Explain the difference between the economic and financial definitions of business failure. LO1
What is a tax-free merger? LO1
What is a leveraged buyout? What is mezzanine financing? LO1
What are the differences between the purchase method and the pooling of interests method of accounting for mergers? LO1
Explain what happens to the postmerger earnings-per-share figure when a company with a relatively high P/E ratio acquires a company with a lower P/E ratio, assuming that the exchange ratio is based
What methods do financial analysts use to value merger candidates? What are the limitations of each method? LO1
What are some of the reasons why firms merge with other firms? LO1
Discuss the differences between the following types of mergers: LO1a. Horizontal mergersb. Vertical mergersc. Conglomerate mergers
What is the difference between an operational restructuring and a financial restructuring? LO1
What is the difference between an asset purchase and a stock purchase? LO1
Describe some of the measures used by companies to discourage unfriendly takeover attempts. LO1
Define the following terms: LO1a. Mergerb. Consolidationc. Holding company
A firm is bankrupt if its total liabilities exceed the value of its total assets. A firm is technically insolvent if it cannot meet its current obligations as they come due, even though the value of
Two major methods are used to value merger candidates: the discounted cash flow method and the comparative multiples method. The discounted cash flow method, which is an application of capital
In the pooling of interests method of accounting for mergers, the acquired assets are recorded at their cost when acquired. In the purchase method, acquired assets are recorded at their fair market
Common stockholders, who share any remaining funds equally on a per-share basis. LO1
Preferred stockholders, who receive an amount up to the par value or stated value of the preferred stock LO1
Claims of general and unsecured creditors LO1
Taxes owed to federal, state, and local governments LO1
Certain customer layaway deposits, not to exceed $900 per individual LO1
Certain unpaid contributions to employee benefit plans (limited to $2,000 per employee)? LO1
Wages owed for services performed during the 3 months prior to the bankruptcy proceedings, not to exceed $2,000 per employee? LO1
Business expenses incurred after an involuntary petition has been filed but before a trustee has been appointed? LO1
The expenses involved in the administration of the bankruptcy? LO1
A firm that has suffered losses and has a tax-loss carry-forward may be a valuable merger candidate to a company that is generating taxable income. If the two companies merge, the losses may be
A firm may desire to diversify its product lines and businesses in an attempt to reduce its business risk by smoothing out cyclical movements in its earnings. For example, a capital equipment
A firm may wish to grow more rapidly than is possible through internal expansion. Acquiring another company may allow a growing firm to move more rapidly into a geographic or product area in which
A firm that is concerned about its sources of raw materials or end-product markets might acquire other firms at different stages of its production or distribution processes. These are vertical
A firm may be able to achieve greater economies of scale by merging with another firm; particularly in the case of a horizontal merger. When the net income for the combined companies after merger
A firm may be able to acquire certain desirable assets at a lower cost by combining with another firm than it could if it purchased the assets directly. In this context, when the market value of a
Poison puts. Issue securities that become valuable only when an unfriendly bidder obtains control of a certain percentage of a company’s shares. One example is a bond that contains a put option
Supermajority voting rules. Insert in the corporate charter voting rules that require a supermajority of shares (e.g., 80 percent) to approve any takeover proposals.LO1
Golden parachute contracts. Give key executives employment contracts under which the executives will receive large benefits if they are terminated without sufficient cause after a merger. Corporate
Staggered board. Stagger the terms of the board of directors over several years instead of having the entire board come up for election at one time. Thus, the acquiring firm will have difficulty
Business failures, bankruptcy, and liquidation? LO1
Leveraged buyouts? LO1
Antitakeover measures and their purpose? LO1
Divestitures and other forms of corporate restructuring? LO1
What mergers are, the different types, why they occur, and how they are valued? LO1
Other important topics include: LO1a. Leveraged buyouts.b. Divestitures and restructuring.c. Antitakeover measures.
In a bankruptcy proceeding, if the going-concern value of the firm is greater than its liquidation value, it is reorganized; otherwise, it is liquidated.a. A reorganization plan is carried out under
A failing company can eithera. Attempt to resolve its difficulties with its creditors on a voluntary, or informal, basis, orb. Petition the courts for assistance and formally declare bankruptcy. LO1
The primary causes of business failures are economic factors and lack of experience on the part of the owners of the business. LO1
In a financial context, a firm isa. Technically insolvent when it is unable to meet its current obligations as they come due, even though the value of the assets exceeds its liabilitiesb. Legally
In the pooling of interests method of accounting for mergers, the acquired assets are recorded at their original cost. In the purchase method, acquired assets are recorded at their fair market
The acquisition of a company with a higher P/E ratio than that of the acquiror causes the earnings per share figure of the acquiring company to decrease if the exchange ratio is based on current
The valuation of merger candidates involves the application of capital budgeting principles. A merger is an acceptable project if the present value of its expected free cash inflows exceeds the

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