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essentials managerial finance

Questions and Answers of Essentials Managerial Finance

=+c. For each of the stock prices given in partb, at what price would you expect the bond to sell? Why?
=+d. What is the minimum price that you would expect the bond to sell for, regardless of the common stock price behavior?
=+LG 4 P17–14 Determining values: Convertible bond Craig’s Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible into 80 shares
=+a. Calculate the straight bond value of this bond.
=+b. Calculate the conversion (or stock) value of the bond when the market price is$9, $12, $13, $15, and $20 per share of common stock.
=+c. For each of the common stock prices given in partb, at what price would you expect the bond to sell? Why?
=+d. Make a graph of the straight value and conversion value of the bond for each common stock price given. Plot the per-share common stock prices on the x-axis and the bond values on the y-axis. Use
=+P17–15 Implied prices of attached warrants Calculate the implied price of each warrant for each of the bonds in the following table.Bond Price of bond with warrants attached Par value Coupon
=+LG 5 P17–16 Evaluation of the implied price of an attached warrant Petra Jones is considering investing in a $1,000-par-value bond, with 20 years until maturity, and a 12%annual interest rate.
=+a. Find the straight value of the bond.b. Calculate the implied price of all warrants attached to the bond.c. Calculate the implied price of each warrant attached to the bond.d. Based on the
=+LG 5 P17–17 Warrant values Novartis International AG has warrants that allow the purchase of five shares of its outstanding common stock at CHf 7 per share. The common stock price per share and
=+a. For each of the common stock price given, calculate the theoretical warrant value.b. Graph the theoretical and market values of the warrant on a set of axes with pershare common stock price on
=+c. Assume that the warrant value is CHf 15 when the market price of common stock is CHf 8. Does that contradict or support the graph you constructed?Explain.
=+d. Specify the area of warrant premium. Why does this premium exist?e. If the expiration date of the warrants is quite close, would you expect your graph to look different? Explain.
=+P17–18 Common stock versus warrant investment Hans Gruber is evaluating BMW Group’s common stock and warrants to choose the better investment. The company’s stock is currently selling for
=+a. Calculate the number of shares of stock and the number of warrants that Mr.Gruber can buy with his funds.b. Suppose that Mr. Gruber bought the stock, and then sold it after 1 year for
=+c. Suppose that Mr. Gruber purchased warrants and held them for 1 year, and the market price of the stock is still €105. Ignoring brokerage fees and taxes, what would be his net gain if the
=+d. What benefit, if any, would the warrants provide? Are there any differences in the risk of these two alternative investments? Explain.Personal Finance Problem
=+LG 5 P17–19 Common stock versus warrant investment Rajesh Chauhan is a successful doctor who is looking to invest some of his savings (INR 1,000,000) in Dr. Reddy’s Laboratories, an Indian
=+a. If Mr. Chauhan purchases the stock, holds it for 1 year, and then sells it for INR 2,600, what is his total gain? (Ignore brokerage fees and taxes.)
=+b. If Mr. Chauhan purchases the warrants and converts them to common stock in 1 year, what is his total gain if the market price of common shares is actually INR 2,600? (Ignore brokerage fees and
=+c. Repeat questions a andb, assuming that the market price of the stock in 1 year is(1) INR 2,486.10 and (2) INR 2,200.
=+d. Discuss the two alternative and the tradeoffs associated with them.
=+LG 6 P17–20 Options profits and losses Use the information for each of the five 100-share options shown in the following table to calculate the amount of profit or loss an investor would have
=+P17–21 Call option Carol Krebs is considering buying 100 shares of Sooner Products Inc. at$62 per share. Because she has read that the firm will probably soon receive certain large orders from
=+a. What will Carol’s profit be on the stock transaction if its price does rise to $70 and she sells?b. How much will Carol earn on the option transaction if the underlying stock price rises to
=+c. How high must the stock price rise for Carol to break even on the option transaction?d. Compare, contrast, and discuss the relative profit and risk associated with the stock and the option
=+LG 6 P17–22 Put option Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle Inc. The
=+a. Ignoring any brokerage fees or dividends, what profit or loss will Ed make if he buys the option and the lowest price of Carlisle stock during the 90 days is $46,$44, $40, and $35?
=+b. What effect would the price of Carlisle’s stock slowly rising from its initial $46 level to $55 at the end of 90 days have on Ed’s purchase?
=+c. In light of your findings, discuss the potential risks and returns from using put options to attempt to profit from an anticipated decline in share price.
=+LG 6 P17–23 ETHICS PROBLEM A hedge fund charged with managing part of Harvard University’s endowment purchased more than 1 million put options on Enron stock not long before the company went
=+a. Calculate the after-tax cash outflow from the lease for Morris Company.
=+b. Calculate the annual loan payment.
=+c. Determine the interest and principal components of the loan payments.
=+d. Calculate the after-tax cash outflows associated with the purchasing option.
=+e. Calculate and compare the present values of the cash outflows associated with both the leasing and purchasing options.
=+f. Which alternative is preferable? Explain.
=+c. All else being equal, would you recommend the acquisition of Ram Electric by Cavalier Electric? Explain.
=+b. Calculate the net present value (NPV) for the Ram Electric acquisition.
=+a. Determine the present value of the expected future cash inflows over the next 10 years.
=+LG 5 LG 6 P18–17 ETHICS PROBLEM Why might employees and suppliers support management in a Chapter 11 bankruptcy declaration if they will have to wait to be paid and may never get paid? How can a
=+a. Calculate the monthly debt repayment amount.b. Determine how much excess income Jon will have each month after making these payments.
=+LG 5 P18–16 Bankruptcy legislation: Wage-earner plan Jon Morgan is in a financial position where he owes more than he earns each month. Due to his lack of financial planning and a heavy debt
=+d. Each creditor will be paid the full amount of its claims in four equal installments of 25¢ on the dollar. The installments will be in 90-day intervals, beginning in 90 days.Personal Finance
=+c. Each creditor will be paid 90¢ on the dollar in two quarterly installments, starting the next quarter.
=+b. A group of creditors with claims of A$80,000 will be immediately paid in full;the rest will be paid 90¢ on the dollar, payable in 180 days.
=+a. Each creditor will be paid 60¢ on the dollar immediately, and the debts will be considered fully satisfied.
=+LG 5 P18–15 Voluntary settlements: Payments Storm Financial Ltd. recently ran into certain financial difficulties that have resulted in the initiation of voluntary settlement procedures. The firm
=+b. Paying all creditors in full in 2 years.c. Paying a group of creditors 75¢ for each euro owed immediately and paying the remaining creditors 80¢ for each euro owed in four periodic
=+LG 5 P18–14 Voluntary settlements Suppose that Banco Espírito Santo has outstanding debt of€15,000,000. Classify each of the following voluntary settlements as an extension, a composition, or
=+c. Paying a group of creditors with claims of €100 million in full over 10 years and immediately paying the remaining creditors 70¢ on the euro.
=+a. Paying all creditors in full in twenty periodic installments.b. Paying all creditors 25¢ on the euro in exchange for complete discharge of the debt.
=+LG 5 P18–13 Voluntary settlements Assume that the Greek government is considering different options of voluntary settlement with its creditors. Classify each of the following options as an
=+D, which gives Company C voting control over Company D’s $50,000 of total assets.(3) Company B’s fixed assets consist of $60,000 of stock in both Company E and Company F. In both cases, this
=+C. This level of ownership provides voting control.(2) Company C’s total assets of $400,000 include $15,000 of stock in Company
=+d. Answer parts a and b in light of the following additional facts.(1) Company A’s fixed assets consist of $20,000 of common stock in Company
=+c. How does a holding company effectively provide a great deal of control for a small dollar investment?
=+b. If another company owns 15% of the common stock of Scully Corporation and, by virtue of this fact, has voting control, what percentage of the total assets controlled does the outside
=+a. What percentage of the total assets controlled by Scully Corporation does its common stock equity represent?
=+LG 4 P18–12 Holding company Scully Corporation holds enough stock in company A and company B to give it voting control of both firms. Consider the accompanying simplified balance sheets for
=+e. What is the expected market price per share of the merged firm? Explain why this is the case.
=+c. Calculate the price/earnings (P/E) ratio applicable in the acquisition.d. Calculate the postmerger earnings per share (EPS) for Sheldon Enterprises.
=+a. Calculate the ratio of exchange in market price.b. Calculate the price/earnings (P/E) ratio for each firm.
=+LG 3 P18–11 EPS and postmerger price Sheldon Enterprises is considering a merger with Weldon Enterprises by swapping 1.5 shares of its stock for each share of Weldon stock.Sheldon Enterprises
=+d. If you were the financial manager of Safran, which would you recommend from partb, (1) or (2)? Explain your answer.
=+c. Graph the premerger and postmerger EPS figures developed in parts a and b with the year on the x-axis and the EPS on the y-axis.
=+b. What would Safran’s stockholders earn in each of the next 6 years if each of their Safran shares was swapped for Zodiac shares at a ratio of (1) 2 and (2) 1.8 share of Zodiac for 1 share of
=+a. Calculate the expected earnings per share (EPS) for Safran for each of the next 6 years without the merger (which includes the last year’s earnings of€15.78 billion).
=+LG 3 P18–10 Expected EPS: Merger decision Safran S.A. is considering a merger with Zodiac Aerospace. Safran had earnings of €15.78 billion last year, has 409 million shares outstanding, and
=+P18–9 Ratio of exchange Use the information in the following table to determine the ratio of exchange (1) of shares and (2) in market price for each of the cases shown. What does each ratio
=+d. How much, effectively, has been earned on behalf of each of the original shares of Shelby’s stock?
=+c. How much, effectively, has been earned on behalf of each of the original shares of Ponting’s stock?
=+b. If the earnings for each firm remain unchanged, what will be the postmerger earnings per share?
=+a. How many new shares of stock will Shelby have to issue to make the proposed merger?
=+LG 3 P18–8 EPS and merger terms Shelby Computing is interested in acquiring Ponting Consultants by swapping 0.6 shares of its stock for each share of Ponting’s stock. Additional financial
=+c. Repeat part a if the ratio of exchange is 2.4.d. What is the change in the EPS of the acquiring firm and the target firm as calculated in parts a through c.
=+a. Suppose the ratio of exchange is 1.6. Calculate the earnings per share (EPS)based on the original shares of each firm.b. Repeat part a if the ratio of exchange is 2.0.
=+LG 3 P18–7 Ratio of exchange and EPS Sunshine Pools is considering the acquisition of Cool Pools. Certain financial information on these companies are summarized in the following table Sunshine
=+monthly employer-paid benefits, which includes health insurance, life insurance, and pension contributions totaling €700. Greta expects her federal and state income taxes to total about €1,200
=+Assume that Hans and Greta have been married for 6 years, and have a son named Michael who is 4 years old and needs child-care services. Currently, Greta is a stay-at-home mother but she is
=+LG 3 P18–6 Divestitures In corporate settings, it is not unusual for firms to assess the financial viability of a business unit and decide whether to retain it within the corporation or divest
=+c. If the cost of capital did not change with the acquisition, would your decision in part b be different? Explain.Personal Finance Problem
=+a. Would you recommend the acquisition?b. If Spring Clean Chemicals could invest the $250,000 in equipment required for a production process that will provide cash inflows of $52,000 per year for
=+LG 3 P18–5 Cash acquisition decision After conducting a viability study, Spring Clean Chemicals is considering acquiring Daily Chemicals for $250,000 cash price. Spring Clean estimates that the
=+c. Assume Plumbing Company could purchase the same assets that would provide slightly better quality. The new assets cost $110,000 and would result in a$30,000 annual cash inflow for 10 years.
=+a. What is the effective or net cost of the assets obtained from Bathroom Goodies?b. If acquisition is the only way Plumbing Company can obtain the particular assets, should the firm proceed with
=+LG 3 P18–4 Asset acquisition decision Plumbing Company is evaluating a proposal to acquire Bathroom Goodies at a cash price of $75,000. Bathroom Goodies has liabilities of$90,000 and has some
=+d. Use your answers in parts a through c to explain why a target company can have different values to different potential acquiring firms.
=+c. What is the maximum cash price each interested firm would be willing to pay for Terna? (Hint: Calculate the present value of the tax advantages.)
=+a. What is the tax advantage of the merger each year for Enel?b. What is the tax advantage of the merger each year for Eni?
=+Both Enel’s and Eni’s expected earnings are assumed to fall within the annual limit legally allowed in Italy for application of the tax loss carryforward resulting from the proposed merger (see
=+LG 1 LG 3 P18–3 Tax benefits and price Terna Group, one of the main electricity transmission grid operators in Europe, has a tax loss carryforward of €6,000,000. Two firms are interested in
=+c. What are the total benefits associated with the tax losses from the merger?(Ignore present value.)d. Do you recommend the proposed merger? Support your answer with figures.
=+b. Calculate Turner and Fitting Company’s tax payments and earnings after taxes for each of the next 5 years with the merger.
=+a. Calculate Turner and Fitting Company’s tax payments and earnings after taxes for each of the next 5 years without the merger.
=+All estimated earnings are assumed to fall within the annual limit that is legally allowed for application of the tax loss carryforward resulting from the proposed merger (see footnote 2 on page
=+LG 1 LG 3 P18–2 Tax effects of acquisition Turner and Fitting Company is evaluating the acquisition of Steel and Pipes Enterprises for $2.1 million. Steel and Pipes has a tax loss carryforward
=+c. If Paper Mill can be acquired for $4.5 million in cash, should the acquisition be made? Base your decision on tax considerations. (Ignore present value.)
=+b. If the acquisition is made, calculate Pen and Paper’s tax liability and earnings after taxes each year over the next 10 years.

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