Questions and Answers of Foundations Of Financial Management 17th

4. The Office Automation Corporation is considering a foreign investment.The initial cash outlay will be $10 million. The current foreign exchange rate is 2 ugans = $1. Thus the investment in foreign
3. From your analysis of these pages, where is McDonald’s most profitable? Rank profitability by region.Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight.Click on
2. What percentage of operating benefits comes from the various geographic areas?Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight.Click on “Company,” which is the First box
1. What percentage of sales is derived from the various geographic areas?Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight.Click on “Company,” which is the First box below
3. Click on “Investment Funds.” Are equity funds targeted to firms in developing countries?Chapter 21 deals with international finance and the decisions that companies have to make when operating
2. Click on “Financing” and describe the business size that qualifies for “Structured Financing” and the types of industries that may use it. May other co-lenders be involved?Chapter 21 deals
1. Click on “Insurance” and describe the types of political risks that can be covered.Chapter 21 deals with international finance and the decisions that companies have to make when operating in a
7. You are the vice president of finance for International Resources, Inc., headquartered in Denver, Colorado. In January 2007 your firm’s Canadian subsidiary obtained a six-month loan of 100,000
6. A French investor buys 100 shares of Goodyear Corp. for $3,000 ($30 per share).Over the course of a year, the stock goes up by 6 points.a. If there is a 10 percent gain in the value of the dollar
5. An investor in the United States bought a one-year Brazilian security valued at 195,000 Brazilian reals. The U.S. dollar equivalent was $100,000. The Brazilian security earned 16 percent during
4. In problem 3, if the United States had somehow managed no inflation since 1979, what should the exchange rate be in 2008, using the purchasing power theory?
3. From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 200 and 410, respectively. If the 1979 $/riyal exchange rate was$0.26/riyal, what should the exchange
2. Suppose the Mexican peso is selling for $0.0909 and an Irish punt is selling for$1.5035. What is the exchange rate (cross rate) of the Mexican peso to the Irish punt? That is, how many Mexican
1. The Wall Street Journal reported the following spot and forward rates for the Swiss franc ($/SF).Spot ........................................ .....$0.8202 30-day forward ........................
2. An investor in the United States bought a one-year New Zealand security valued at 200,000 New Zealand dollars. The U.S. dollar equivalent was $100,000. The New Zealand security earned 15 percent
1. Suppose a Swedish krona is selling for $0.1286 and a Maltan lira is selling for$2.8148. What is the exchange rate (cross rate) of the Swedish krona to the Maltan lira?
16. Comment on any dilemmas that multinational firms and their foreign affiliates may face in regard to debt ratio limits and dividend payouts. (L05)
15. What are ADRs? (L05)
14. What is the danger or concern in floating a Eurobond issue? (L05)
13. What is LIBOR? How does it compare to the U.S. prime rate? (L05)
12. What are the differences between a parallel loan and a fronting loan? (L05)
11. Explain the functions of the following agencies: (L05)Overseas Private Investment Corporation (OPIC).Export-Import Bank (Eximbank).Foreign Credit Insurance Association (FCIA).International
10. What is a letter of credit? (L05)
9. What factors beyond the normal domestic analysis go into a financial feasibility study for a multinational firm? (L04)
8. What procedure(s) would you recommend for a multinational company in studying exposure to political risk? What actual strategies can be used to guard against such risk? (L04)
7. What factors would influence a U.S. business firm to go overseas? (LOl)
6. What is meant by translation exposure in terms of foreign exchange risk? (L02)
5. Differentiate between the spot exchange rate and the forward exchange rate.(L02)
4. Explain how exports and imports tend to influence the value of a currency. (L02)
3. List the factors that affect the value of a currency in foreign exchange markets.(L02)
2. What allegations are sometimes made against foreign affiliates of multinational firms and against the multinational firms themselves? (LOl)
1. What risks does a foreign affiliate of a multinational firm face in today’s business world? (L03&4)
4. Write a short analysis of your findings, single spaced on no more than one page.Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight. Click on "Company," which is the first box
3. Look at the long-term debt as a percentage of total capitalization. What happened to P&G’s financial leverage in 2005 and how has the ratio changed since 2005?How has the change in financial
2. Analyze Procter and Gamble’s profit margins and other measures of profitability before and after 2005. Have these measures of profitability improved since the acquisition of Gillette? You can
1. How much did Procter and Gamble pay for Gillette on October 1, 2005?Log onto the S&P Market Insight Web site, www.mhhe.com/edumarketinsight. Click on "Company," which is the first box below the
3. In two paragraphs describe how Chevron appears to be doing a number of years after the merger.
2. Also compute (for each of the three years)a. Net income to total revenue.b. Net income to tangible net assets.
1. By what percentage did the following change for the three years under observation?a. Total revenue.b. Net income.c. Total stockholders’ equity.
12. McNeeley Construction Co. is considering two mergers. The first is with Firm A in its own volatile industry, whereas the second is a merger with Firm B in an industry that moves in the opposite
11. Assume the Knight Corporation is considering the acquisition of Day, Inc. The expected earnings per share for the Knight Corporation will be $4.00 with or without the merger. However, the
10. Lindbergh Airlines is planning to make an offer for Flight Simulators, Inc. The stock of Flight Simulators is currently selling for $30 a share.a. If the tender offer is planned at a premium of
9. The Alpha Corporation is considering a two-step buyout of Beta Environmental Systems. The latter firm has 2 million shares outstanding and its stock price is currently$20 per share. In the
8. Dr. Payne helped start Surgical Inc. in 1993. At the time, he purchased 200,000 shares of stock at $1.00 per share. In 2008 he has the opportunity to sell his interest in the company to Medical
7. The Jeter Corporation is considering acquiring the A-Rod Corporation. The data for the two companies are as follows:a. The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over
6. Assume the following financial data for the Barker Corporation and Howell Enterprises.a. If all the shares of the Barker Corporation are exchanged for those of Howell Enterprises on a
5. Assume the following financial data for Noble Corporation and Barnes Enterprises:a. If all the shares of Noble Corporation are exchanged for those of Barnes Enterprises on a share-for-share basis,
4. 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
3. Texas Investments, Inc., is considering a cash acquisition of Bubba Brewing Co.for $2.2 million. Bubba Brewing will provide the following pattern of cash inflows and synergistic benefits for the
2. Assume that Citrus Corporation is considering the acquisition of Orange Juice, Inc. The latter has a $500,000 tax loss carryforward. Projected earnings for the Citrus Corporation are as follows:a.
1. The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for $3 million. Kent has a $700,000 tax loss carryforward that could be used immediately by the Clark
2. Assume the following financial data for the Rotan Corp. and the Mosley Corp.If all the shares of Rotan Corp. are exchanged for Mosley Corp. on a sharefor-share basis, what will the postmerger
1. American Century Corp. is considering acquiring Southern Homes, Inc.Southern Homes has a tax loss carryforward of $240,000. Projected earnings for American Century Corp. are as follows:a. How much
12. What is the purpose(s) of the two-step buyout from the viewpoint of the acquiring company? (L02)
11. Why do management and stockholders often have divergent viewpoints about the desirability of a takeover? (L05)
10. What is a typical merger premium paid in a merger or acquisition? What effect does this premium have on the market value of the merger candidate and when is most of this movement likely to take
9. Suggest some ways in which firms have tried to avoid being part of a target takeover. (L05)
8. How is goodwill now treated in a merger? (L02)
7. It is possible for the postmerger P/E ratio to move in a direction opposite to that of the immediate postmerger earnings per share. Explain why this could happen.(L03)
6. If a firm wishes to achieve immediate appreciation in earnings per share as a result of a merger, how can this be best accomplished in terms of exchange variables? What is a possible drawback to
5. What is synergy? What might cause this result? Is there a tendency for management to over- or underestimate the potential synergistic benefits of a merger? (LOl)
4. What is the difference between horizontal integration and vertical integration?How does antitrust policy affect the nature of mergers? (LOI)
3. Why might the portfolio effect of a merger provide a higher valuation for the participating firms? (L04)
2. What is the difference between a merger and a consolidation? (LOI)
1. Name three industries in which mergers have been prominent. (LOI )
3. Scroll down to “Equity LEAPS Strategy Discussion.” Briefly explain how equity LEAPS calls can be used to anticipate a rally.
2. Continue to scroll down the page until you get to “LEAPS.” What does the title stand for? How long a life may a LEAP have?
1. What are the first five products offered?
23. I. M. Stem, Inc. (IMS) has $30 million of convertible bonds outstanding (30,000 bonds at $ 1,000 par value) with a coupon rate of 10 percent. Interest rates are currently 8 percent for bonds of
22. The Furgeson Corporation has 1,000 convertible bonds ($1,000 par value) outstanding, each of which may be converted to 50 shares ($20 conversion price). The $1 million worth of bonds has 15 years
21. Tulsa Drilling Company has $1 million in 11 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $32, and the bonds mature in 10
20. Meyers Business Systems has 2 million shares of stock outstanding. Earnings with warrants after taxes are $4 million. Meyers also has warrants outstanding that allow the holder to buy 100,000
19. Hughes Technology has had net income of $450,000 in the current fiscal year.There are 100,000 shares of common stock outstanding along with convertible bonds, which have a total face value of
18. Liz Todd has $1,200 to invest in the market. She is considering buying 48 shares of the Eagle Corporation at $25 per share. Her broker suggests she may wish to consider purchasing warrants
17. Assume in problem 16 that Cinema Corp. common stock was selling for $40 per share when the Redford Investment Company bought the warrants.a. What was the intrinsic value of a warrant at that
16. The Redford Investment Company bought 100 Cinema Corp. warrants one year ago and would like to exercise them today. The warrants were purchased at $24 each, and they expire when trading ends
15. Assume you can buy a warrant for $5 that gives you the option to buy one share of common stock at $14 per share. The stock is currently selling at $16 per share.a. What is the intrinsic value of
14. Laser Electronics Company has $30 million in 8 percent convertible bonds outstanding.The conversion ratio is 50; the stock price is $17; and the bond matures in 15 years. The bonds are currently
13. Defense Systems, Inc., has convertible bonds outstanding that are callable at$1,070. The bonds are convertible into 33 shares of common stock. The stock is currently selling for $39.25 per
12. Eastern Digital Corp. has a convertible bond outstanding with a coupon rate of 9 percent and a maturity date of 20 years. It is rated Aa, and competitive, nonconvertible bonds of the same risk
11. Western Pipeline, Inc., has been very successful in the last five years. Its $1,000 par value convertible bonds have a conversion ratio of 28. The bonds have a quoted interest rate of 5 percent a
10. In problem 9, if the interest rate on similar bonds, which are not convertible, goes up from 12 percent to 14 percent, what will be the new pure bond value of the Reynolds bonds? Assume the
9. Reynolds Technology has a convertible bond outstanding, trading in the marketplace at $835. The par value is $1,000, the coupon rate is 9 percent, and the bond matures in 25 years. The conversion
8. Iowa Meat Packers, Inc., has a convertible bond quoted on the NYSE bond market at 85. (Bond quotes represent percentage of par value. Thus 70 represents$700, 80 represents $800, and so on.) The
7. The bonds of Goniff Bank & Trust have a conversion premium of $90. Their conversion price is $20. The common stock price is $16.50. What is the price of the convertible bonds?
6. The bonds of Goldman Sack Co. have a conversion premium of $55. Their conversion price is $40. The common stock price is $42. What is the price of the convertible bonds?
5. Plunkett Gym Equipment, Inc., has a $1,000 par value convertible bond outstanding that can be converted into 25 shares of common stock. The common stock is currently selling for $34.75 a share,
4. The warrants of Microsystems Corporation allow the holder to buy a share of stock at $15.50 and are selling for $4.80. The stock price is currently $13.70. To what price must the stock go for the
3. The warrants of Integra Life Sciences allow the holder to buy a share of stock at $11.75 and are selling for $2.85. The stock price is currently $8.50. To what price must the stock go for the
2. Quantum, Inc., has warrants outstanding that allow the holder to purchase 1.5 shares of stock per warrant at $30 per share (exercise price). Thus, each individual share can be purchased at $30
1. Preston Toy Co. has warrants outstanding that allow the holder to purchase a share of stock for $22 (exercise price). The common stock is currently selling for$28, while the warrant is selling for
2. Eaton Hotel Corp. has warrants outstanding that allow the warrant holder to purchase 1.3 shares of stock per warrant at $9 per share (exercise price). The common stock is currently selling for
1. Scientific Instruments has a $ 1,000 par value convertible bond outstanding with a conversion ratio of 25. The common stock is selling for $45. The convertible bond is selling for $1,165.70.a.
13. You buy a stock option with an exercise price of $50. The cost of the option is$4. If the stock ends up at $56, indicate whether you have a profit or loss with a call option? With a put option?
12. Suggest two areas where the use of futures contracts is most common. What percentage of the value of the underlying security is typical as a down payment in a futures contract? (LOÓ)
11. What is the difference between a call option and a put option? (L06)
10. What are the reasons that warrants often sell above their intrinsic value? (L04)
9. Explain why warrants are issued. (Why are they used in corporate finance?) (L04)
8. Explain how convertible bonds and warrants are similar and different. (L01&4)
7. Explain the difference between basic earnings per share and diluted earnings per share. (L05)

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