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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

15–7. What factors contribute to the high positive abnormal returns to shareholders before the announcement of a voluntary bust-up?
15–8. What factors influence a parent firm’s decision to undertake a spin-off rather than a divestiture or equity carve-out?
15–9. How might the form of payment affect the abnormal return to sellers and buyers?
15–10. How might spin-offs result in a wealth transfer from bondholders to shareholders?
15–14. After months of trying to sell its 81-percent stake in Blockbuster Inc., Viacom undertook a spin-off in mid-2004. Why would Viacom choose to spin off rather than divest its Blockbuster unit?
15–15. Since 2001, GE, the world’s largest conglomerate, had been underperforming the S&P 500 stock index. In late 2008, the firm announced that it was considering spinning off its consumer and
1. How did changes in Hughes’s external environment contribute to its dramatic 20-year restructuring effort? Cite specific influences in answering this question.(Hint: Consider the motivations
2. Why did Hughes’s board and management seem to rely heavily on divestitures rather than other restructuring strategies discussed in this chapter to achieve the radical transformation of the firm?
3. What risks did Hughes face in moving completely away from its core defense business and into a high-technology commercial business? In your judgment, did Hughes move too quickly or too slowly?
4. Why did Hughes move so aggressively to hire employees from the cable TV and broadcast industry?
5. Speculate as to why News Corp, a major entertainment industry content provider, might have been interested in acquiring Hughes. Be specific.
1. What were the primary factors contributing to AT&T’s numerous restructuring efforts since 1984? How did they differ? How were they similar?
2. Why do you believe that AT&T chose to split off its wireless operations rather than divest the unit? What might you have done differently?
3. Was AT&T proactive or reactive in initiating its 2000 restructuring program?Explain your answer.
4. AT&Toverpaid for many of its largest acquisitions made during the 1990s. How might this have contributed to its subsequent restructuring efforts?
5. To what extent were AT&T’s ineffectual restructuring efforts a function of factors beyond management’s control and to what extent were they due to poor implementation? Be specific.
6. What challenges did AT&T face in trying to split up the company in 2000? What might you have done differently to overcome these obstacles?
16–1. Why are strong creditor rights important to an efficiently operating capital market? What is the purpose of bankruptcy in promoting capital market efficiency?
16–2. Of all possible stakeholders to the bankruptcy process, which are likely to benefit the most? Which are likely to benefit the least? Explain your answer.
16–3. What are the advantages to the lender and the debtor firm’s shareholders of reaching a negotiated settlement outside of bankruptcy court? What are the primary disadvantages?
16–4. How does the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 differ from the Bankruptcy Reform Act of 1978? It what ways do you feel that it represents an improvement? In what
16–5. What are prepackaged bankruptcies? In what ways do they represent streamlining of the credit recovery process?
16–6. Why would creditors make concessions to a debtor firm? Give examples of common types of concessions. Describe how these concessions affect the debtor firm.
16–8. What are the primary options available to a failing firm? What criteria might the firm use to select a particular option? Be specific.
16–9. Describe the probable trend in financial returns to shareholders of firms that emerge from bankruptcy. To what do you attribute these trends? Explain your answer.
16–10. Identify at least two financial or nonfinancial variables that have been shown to affect firm defaults and bankruptcies. Explain how each might affect the likelihood the firm will default or
16–13. What are the primary factors contributing to business failure? Be specific.
1. In your judgment, what were the major factors contributing to the demise of Enron? Of these factors, which were the most important? Explain your answer.
2. In what way was the Enron debacle a breakdown in corporate governance(oversight)? Explain your answer.
3. How were the Enron partnerships used to hide debt and inflate the firm’s earnings? Should partnership structures be limited in the future? If so, how?
4. What should (or can) be done to reduce the likelihood of this type of situation arising in the future? Assess the impact of your proposals on the willingness of corporate managers to take risks.
1. To what extent do you believe the factors contributing to the airline’s bankruptcy were beyond the control of management? To what extent do you believe past airline mismanagement may have
2. Comment on the fairness of the bankruptcy process to shareholders, lenders, employees, communities, government, and so forth. Be specific.
3. Why would lenders be willing to lend to a firm emerging from Chapter 11? How did the lenders attempt to manage their risks? Be specific.
4. In view of the substantial loss of jobs, as well as wage and benefit reductions, do you believe that firms should be allowed to reorganize in bankruptcy? Explain your answer.
5. How does Chapter 11 potentially affect adversely competitors of those firms emerging from bankruptcy? Explain your answer.
17–3. Describe the circumstances under which a firm may find a merger or acquisition a more favorable market entry strategy than a joint venture with a firm in the local country.
17–5. Compare and contrast laws that might affect acquisitions by a foreign firm in the United States. In the European Union.
17–6. Discuss the circumstances under which a non-U.S. buyer may choose a U.S.corporate structure as its acquisition vehicle. A limited liability company? A partnership?
17–7. What factors influence the selection of which tax rate to use (i.e., the target’s or the acquirer’s) in calculating the weighted-average cost of capital in crossborder transactions?
17–8. Discuss adjustments commonly made in estimating the cost of debt in emerging countries.
17–9. Find an example of a recent cross-border transaction in the business section of a newspaper. Discuss the challenges an analyst might face in valuing the target firm.
17–10. Discuss the various types of adjustments for risk that might be made to the global CAPM before valuing a target firm in an emerging country. Be specific.
17–11. Do you see the growth in sovereign wealth funds as important sources of capital to the M&A market or as a threat to the sovereignty of the countries in which they invest? Explain your answer.
17–12. What primary factors contribute to the increasing integration of the global capital markets? Be specific.
17–13. Give examples of economic and political risk that you could reasonably expect to encounter in acquiring a firm in an emerging economy. Be specific.
17–14. During the 1980s and 1990s, changes in the S&P 500 (a broadly diversified index of U.S. stocks) were about 50 percent correlated with the MSCI EAFE Index (a broadly diversified index of
1. Should CNNOC have been permitted to buy Unocal? Why or why not?
2. How might the Chinese have been able to persuade U.S. regulatory authorities to approve the transaction?
3. The U.S. and European firms are making substantial investments (including M&As) in China. How should the Chinese government react to this rebuff?
1. Who do you think negotiated the best deal for their shareholders, Chris Gent or Klaus Esser? Explain your answer in terms of short- and long-term impacts.
2. Both firms were pursuing a similar strategy of expanding their geographic reach.Does this strategy make sense? Why or why not? What risks are associated with this strategy?
3. Do you think the use of all stock, rather than cash or a combination of cash and stock, to acquire Mannesmann helped or hurt Vodafone AirTouch’s shareholders?
4. Do you think that Vodafone AirTouch conceded too much to the labor unions and Mannesmann’s management to get the deal done? Explain your answer.
5. What problems do you think Vodafone AirTouch might experience if they attempt to introduce what they view as “best operating practices” to the Mannesmann culture? How might these challenges be
Should Warf buy or lease the equipment?Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture,
Leasing vs. Purchase Why wouldn’t China Eastern Airlines purchase the planes if they were obviously needed for the company’s operations?
Reasons to Lease Why would ALC be willing to buy planes from Boeing and Airbus and then lease the planes to China Eastern Airlines? How is this different from just lending money to China Eastern
Leasing What do you suppose happens to the plane at the end of the lease period?
L ease or Buy Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy?
Leasing Cash Flows What are the cash flows from the lease from the lessor’s viewpoint? Assume a 35 percent tax bracket.
American and European Options What is the difference between an American option and a European option?
Options and Expiration Dates What is the impact of lengthening the time to expiration on an option’s value? Explain.
Options and Stock Price Volatility What is the impact of an increase in the volatility of the underlying stock’s return on an option’s value? Explain.
Insurance as an Option An insurance policy is considered analogous to an option. From the policyholder’s point of view, what type of option is an insurance policy? Why?
Equity as a Call Option It is said that the equityholders of a levered firm can be thought of as holding a call option on the firm’s assets. Explain what is meant by this statement.
You’re trying to value your options. What minimum value would you assign? What is the maximum value you would assign?As a newly minted MBA, you’ve taken a management position with Exotic
Suppose that in three years the company’s stock is trading at $60. At that time, should you keep the options or exercise them immediately? What are some of the important determinants in making such
Your options, like most employee stock options, are not transferable or tradable. Does this have a significant effect on the value of the options? Why?As a newly minted MBA, you’ve taken a
Why do you suppose employee stock options usually have a vesting provision? Why must they be exercised shortly after you depart the company even after they vest?As a newly minted MBA, you’ve taken
Employee Stock Options Why do companies issue options to executives if they cost the company more than they are worth to the executive? Why not just give cash and split the difference? Wouldn’t
Real Options Your company owns a vacant lot in a suburban area. What is the advantage of waiting to develop the lot?
Warrants and Options What is the primary difference between a warrant and a traded call option?
Warrants Explain the following limits on the prices of warrants:a. If the stock price is below the exercise price of the warrant, the lower bound on the price of a warrant is zero.b. If the stock
Convertible Bonds and Stock Volatility Suppose you are evaluating a callable, convertible bond. If the stock price volatility increases, how will this affect the price of the bond?
Convertible Bond Value What happens to the price of a convertible bond if interest rates increase?
Warrants and Convertibles Why do firms issue convertible bonds and bonds with warrants?
Conversion Ratio A convertible bond has a conversion price of $61.50. What is the conversion ratio of the bond?
Conversion Premium Eckely, Inc., recently issued bonds with a conversion ratio of 17.5. If the stock price at the time of the bond issue was $48.53, what was the conversion premium?
Convertible Bonds Hannon Home Products, Inc., recently issued $2 million worth of 8 percent convertible debentures. Each convertible bond has a face value of$1,000. Each convertible bond can be
Warrants The capital structure of Ricketti Enterprises, Inc., consists of 20 million shares of common stock and 1.5 million warrants. Each warrant gives its owner the right to purchase one share of
Cost of Current Assets Grohl Manufacturing, Inc., has recently installed a justin-time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage
Operating and Cash Cycles Is it possible for a firm’s cash cycle to be longer than its operating cycle? Explain why or why not.
Shortage Costs What are the costs of shortages? Describe them.
Operating and Cash Cycles What impact did this change in payables policy have on BlueSky’s operating cycle? Its cash cycle?
Cash Equation McConnell Corp. has a book value of equity of $13,205. Longterm debt is $8,200. Net working capital, other than cash, is $2,205. Fixed assets are$18,380. How much cash does the company
Short-Term Finance Policy Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here.a. How are the current assets of each firm
Size of Accounts Receivable The Paden Corporation has annual sales of $34 million.The average collection period is 33 days. What is the average investment in accounts receivable as shown on the
ACP and Receivables Turnover Bell Tolls, Inc., has an average collection period of 36 days. Its average daily investment in receivables is $58,300. What are annual credit sales? What is the
Merger Rationale Explain why diversification per se is probably not a good reason for merger.
Corporate Split In July 2011, fast food restaurant chain Wendy’s/Arby’s announced that it had sold its Arby’s restaurants and would change its name back to Wendy’s.Arby’s was purchased by
Merger and Taxes Describe the advantages and disadvantages of a taxable merger as opposed to a tax-free exchange. What is the basic determinant of tax status in a merger? Would an LBO be taxable or
Cash versus Stock as Payment In Problem 10, are the shareholders of Firm T better off with the cash offer or the stock offer? At what exchange ratio of B shares to T shares would the shareholders in
Prepackaged Bankruptcy What is prepackaged bankruptcy? What is the main benefit of prepackaged bankruptcy?
Financial Distress Why doesn’t financial distress always cause firms to die?
APR What is the absolute priority rule?
DIP Loans What are DIP loans? Where do DIP loans fall in the APR?
Bankruptcy Ethics Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy laws “as a sword
SML Cost of Equity Estimation If you use the stock beta and the security market line to compute the discount rate for a project, what assumptions are you implicitly making?
SML Cost of Equity Estimation What are the advantages of using the SML approach to finding the cost of equity capital? What are the disadvantages? What are the specific pieces of information needed

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