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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

Conversion Price A convertible bond has a conversion ratio of 24.6. What is the conversion price?
Warrant Value A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $53 per share. The current market price of the stock is $58. What is the minimum
Convertible Bond Value An analyst has recently informed you that at the issuance of a company’ s convertible bonds, one of the two following sets of relationships existed:Scenario A Scenario B Face
Convertible Bond Value Sportime Fitness Center, Inc., issued convertible bonds with a conversion price of $51. The bonds are available for immediate conversion.The current price of the company ’ s
Convertible Bonds You own a callable, convertible bond with a conversion ratio of 24.25.The stock is currently selling for $48 per share. The issuer of the bond has announced a call at a call price
Warrant Value General Modems has five-year warrants that currently trade in the open market. Each warrant gives its owner the right to purchase one share of common stock for an exercise price of
Convertible Bonds Bernanke Corp. has just issued a 30-year callable, convertible bond with a coupon rate of 6 percent annual coupon payments. The bond has a conversion price of $93. The company ’ s
Convertible Bonds Rob Stevens is the chief executive officer of Isner Construction, Inc., and owns 950,000 shares of stock. The company currently has 6 million shares of stock and convertible bonds
Convertible Calculations You have been hired to value a new 20-year callable, convertible bond. The bond has a 5.8 percent coupon rate, payable annually. The conversion price is $150, and the stock
Warrant Value Superior Clamps, Inc., has a capital structure consisting of 7 million shares of common stock and 900,000 warrants. Each warrant gives its owner the right to purchase one share of newly
Why do you think Chris is suggesting a conversion price of $45? Given that the company is not publicly traded, does it even make sense to talk about a conversion price?Chris Guthrie was recently
What is the floor value of the S & S Air convertible bond?Chris Guthrie was recently hired by S & S Air, Inc., to assist the company with its shortterm financial planning and to evaluate the company
What is the conversion ratio of the bond?Chris Guthrie was recently hired by S & S Air, Inc., to assist the company with its shortterm financial planning and to evaluate the company ’ s
What is the conversion premium of the bond?Chris Guthrie was recently hired by S & S Air, Inc., to assist the company with its shortterm financial planning and to evaluate the company ’ s
What is the value of the option?Chris Guthrie was recently hired by S & S Air, Inc., to assist the company with its shortterm financial planning and to evaluate the company ’ s performance. Chris
Is there anything wrong with Todd ’ s argument that it is cheaper to issue a bond with a convertible feature because the required coupon is lower?Chris Guthrie was recently hired by S & S Air,
Is there anything wrong with Mark ’ s argument that a convertible bond is a bad idea because it allows new shareholders to participate in gains made by the company?Chris Guthrie was recently hired
How can you reconcile the arguments made by Todd and Mark?Chris Guthrie was recently hired by S & S Air, Inc., to assist the company with its shortterm financial planning and to evaluate the company
During the debate, a question comes up concerning whether the bonds should have an ordinary (not make-whole) call feature. Chris confuses everybody by stating, “ The call feature lets S & S Air
Hedging Strategies If a firm is buying call options on pork belly futures as a hedging strategy, what must be true about the firm’s exposure to pork belly prices?
Forwards and Futures What is the difference between a forward contract and a futures contract? Why do you think that futures contracts are much more common? Are there any circumstances under which
Hedging Interest Rates A company has a large bond issue maturing in one year.When it matures, the company will float a new issue. Current interest rates are attractive, and the company is concerned
Swaps Explain why a swap is effectively a series of forward contracts. Suppose a firm enters a swap agreement with a swap dealer. Describe the nature of the default risk faced by both parties.
Swaps Suppose a firm enters a fixed for floating interest rate swap with a swap dealer. Describe the cash flows that will occur as a result of the swap.
Hedging Strategies For the following scenarios, describe a hedging strategy using futures contracts that might be considered.a. A public utility is concerned about rising costs.b. A candy
Hedging Strategies William Santiago is interested in entering the import/export business. During a recent visit with his financial advisers, he said, “If we play the game right, this is the safest
Hedging Strategies Kevin Nomura is a Japanese student who is planning a oneyear stay in the United States. He expects to arrive in the United States in eight months. He is worried about depreciation
Futures Quotes Refer to Table 25.2 in the text to answer this question. Suppose you sell five March 2012 silver futures contracts on November 22, 2011, at the last price of the day. What will your
Marking to Market You are long 10 gold futures contracts, established at an initial settle price of $1,580 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days,
Marking to Market You are short 25 gasoline futures contracts, established at an initial settle price of $2.46 per gallon, where each contract represents 42,000 gallons.Over the subsequent four
Duration What is the duration of a bond with three years to maturity and a coupon of 7 percent paid annually if the bond sells at par?
Duration What is the duration of a bond with four years to maturity and a coupon of 8 percent paid annually if the bond sells at par?
Duration Blue Steel Community Bank has the following market value balance sheet:Asset or Liability Market Value(in $ millions)Duration(in years)Federal funds deposits $ 31 0 Accounts receivable 590
Hedging with Futures Refer to Table 25.2 in the text to answer this question.Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March
Interest Rate Swaps ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a well-established firm with an excellent credit
Duration Ted and Alice Hansel have a son who will begin college 10 years from today. School expenses of $30,000 will need to be paid at the beginning of each of the four years that their son plans to
Duration What is the duration of a bond with two years to maturity if the bond has a coupon rate of 7 percent paid semiannually, and the market interest rate is 5 percent?
Forward Pricing The forward price ( F ) of a contract on an asset with neither carrying costs nor convenience yield is the current spot price of the asset ( S 0 )multiplied by 1, plus the appropriate
Forward Pricing You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1,000, and the 1-year and 11-year spot interest
Forward Pricing This morning you agreed to buy a one-year Treasury bond in six months. The bond has a face value of $1,000. Use the spot interest rates listed here to answer the following
Financial Engineering Suppose there were call options and forward contracts available on coal, but no put options. Show how a financial engineer could synthesize a put option using the available
What is the monthly mortgage payment on Jerry’s mortgage?Jennifer Williamson recently received her MBA and has decided to enter the mortgage brokerage business. Rather than work for someone else,
What is the most significant risk Jennifer faces in this deal?Jennifer Williamson recently received her MBA and has decided to enter the mortgage brokerage business. Rather than work for someone
How can Jennifer hedge this risk?Jennifer Williamson recently received her MBA and has decided to enter the mortgage brokerage business. Rather than work for someone else, she has decided to open her
Suppose that in the next three months the market rate of interest rises to 6.2 percent.a. How much will Max be willing to pay for the mortgage?b. What will happen to the value of Treasury bond
Suppose that in the next three months the market rate of interest falls to 4.6 percent.a. How much will Max be willing to pay for the mortgage?b. What will happen to the value of Treasury bond
Are there any possible risks Jennifer faces in using Treasury bond futures contracts to hedge her interest rate risk?Jennifer Williamson recently received her MBA and has decided to enter the
Reasons for Net Working Capital In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?
Calculating Cash Collection s The Litzenberger Company has projected the following quarterly sales amounts for the coming year:Q1 Q2 Q3 Q4 Sales $740 $810 $780 $940a. Accounts receivable at the
Calculating Cycle s Consider the following financial statement information for the Bulldog Icers Corporation:Item Beginning Ending Inventory $17,385 $19,108 Accounts receivable 13,182 13,973 Accounts
Calculating Payment s Lewellen Products has projected the following sales for the coming year:Q1 Q2 Q3 Q4 Sales $620 $555 $705 $780 Sales in the year following this one are projected to be 15 percent
Calculating Payments The Thakor Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and
Calculating Cash Collection s The following is the sales budget for Shleifer, Inc., for the first quarter of 2013:January February March Sales budget $234,800 $249,300 $271,000 Credit sales are
Calculating the Cash Budge t Here are some important figures from the budget of Cornell, Inc., for the second quarter of 2013:April May June Credit sales $547,200 $570,240 $630,720 Credit purchases
Sources and Use s Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the
Cash Budgeting The sales budget for your company in the coming year is based on a quarterly growth rate of 10 percent with the first-quarter sales projection at$225 million. In addition to this basic
Calculating the Cash Budge t Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Q1 Q2 Q3 Q4 Sales $105 $90 $122 $140 Sales for the first quarter of the year after
Cash Management Policy Rework Problem 13 assuming the following:a. Wildcat maintains a minimum cash balance of $20 million.b. Wildcat maintains a minimum cash balance of $10 million.Based on your
Heidi Pedersen, the treasurer for Wood Products, Inc., has just been asked by Justin Wood, the president, to prepare a memo detailing the company’s ending cash balance for the next three months.
Use the numbers given to complete the cash budget and short-term financial plan.You have recently been hired by Keafer Manufacturing to work in its established treasury department. Keafer
Rework the cash budget and short-term financial plan assuming Keafer changes to a minimum cash balance of $90,000.You have recently been hired by Keafer Manufacturing to work in its established
Rework the sales budget assuming an 11 percent growth rate in sales and a 5 percent growth rate in sales. Assume a $135,000 target cash balance.You have recently been hired by Keafer Manufacturing to
Assuming the company maintains its target cash balance at $135,000, what sales growth rate would result in a zero need for short-term financing? To answer this question, you may need to set up a
Financial Distress Define financial distress using the stock-based and flow-based approaches.
Financial Distress What are some benefits of financial distress?
Liquidation versus Reorganization What is the difference between liquidation and reorganization?
Bankruptcy Ethics Several firms have entered bankruptcy, or threatened to enter bankruptcy, at least in part as a means of reducing labor costs. Whether this move is ethical, or proper, is hotly
Bankruptcy versus Private Workouts Why do so many firms file for legal bankruptcy when private workouts are so much less expensive?
Chapter 7 When the Beacon Computer Company filed for bankruptcy under Chapter 7 of the U.S. bankruptcy code, it had the following balance sheet information:Liquidating Value Claims Trade credit $
Chapter 11 When the Master Printing Company filed for bankruptcy, it filed under Chapter 11 of the U.S. bankruptcy code. Key information is shown here:Assets Claims Mortgage bonds $19,000 Senior
Exchange Rate Risk If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value
Using the Cross-Rate Use the information in Figure 31.1 to answer the following questions:a. Which would you rather have, $100 or £100? Why?b. Which would you rather have, 100 Swiss francs (SF) or
Forward Exchange Rates Use the information in Figure 31.1 to answer the following questions:a. What is the six-month forward rate for the Japanese yen in yen per U.S. dollar? Is the yen selling at a
Cross-Rates and Arbitrage Suppose the Japanese yen exchange rate is ¥85 5 $1, and the British pound exchange rate is £ 1 5 $1.53.a. What is the cross-rate in terms of yen per pound?b. Suppose the
Interest Rates and Arbitrage The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .21 percent per month. The interest rate
Exchange Rate Risk Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 31.1. You have just placed an order for 30,000 motherboards at a cost to you
Exchange Rates and Arbitrage Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.61 and Kr 5.72, respectively. The annual risk-free rate in the United States is 3 percent,
Expected Spot Rates Suppose the spot exchange rate for the Hungarian forint is HUF 206.The inflation rate in the United States is 2.8 percent per year and is 3.7 percent in Hungary. What do you
Capital Budgeting Lakonishok Equipment has an investment opportunity in Europe. The project costs €19 million and is expected to produce cash flows of€3.6 million in Year 1,€4.1 million in Year
Capital Budgeting You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 25 million. The cash flows from the project would be
Translation Exposure In the previous problem, assume the equity increases by 1,750 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does
What will happen to the company’s profits if the dollar strengthens? What if the dollar weakens?Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco
Ignoring taxes, what are East Coast Yacht’s projected gains or losses from this proposed arrangement at the current exchange rate of $1.34/€? What will happen to profits if the exchange rate
How can the company hedge its exchange rate risk? What are the implications for this approach?Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco
Taking all factors into account, should the company pursue international sales further?Why or why not?Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in
Bond Features What are the main features of a corporate bond that would be listed in the indenture?
Preferred Stock and Debt What are the differences between preferred stock and debt?
Preferred Stock Preferred stock doesn’t offer a corporate tax shield on the dividends paid. Why do we still observe some firms issuing preferred stock?
Preferred Stock and Bond Yields The yields on nonconvertible preferred stock are lower than the yields on corporate bonds. Why is there a difference? Which investors are the primary holders of
Corporate Financing What are the main differences between corporate debt and equity? Why do some firms try to issue equity in the guise of debt?
Proxy What is a proxy?
Preferred Stock Do you think preferred stock is more like debt or equity? Why?
Long-Term Financing As was mentioned in the chapter, new equity issues are generally only a small portion of all new issues. At the same time, companies continue to issue new debt. Why do companies
Internal versus External Financing What is the difference between internal financing and external financing?
Internal versus External Financing What factors influence a firm’s choice of external versus internal equity financing?
Classes of Stock Several publicly traded companies have issued more than one class of stock. Why might a company issue more than one class of stock?
Callable Bonds Do you agree or disagree with the following statement: In an efficient market, callable and noncallable bonds will be priced in such a way that there will be no advantage or
Bond Prices If interest rates fall, will the price of noncallable bonds move up higher than that of callable bonds? Why or why not?
Sinking Funds Sinking funds have both positive and negative characteristics for bondholders. Why?
Corporate Voting The shareholders of the Stackhouse Company need to elect seven new directors. There are 850,000 shares outstanding currently trading at$43 per share. You would like to serve on the

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