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principles corporate finance

Questions and Answers of Principles Corporate Finance

6.9. A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 10% per annum and pays six-month LIBOR on a principal of $10 million for
6.7. Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.
6.6. Explain the difference between the credit risk and the market risk in a financial contract.
6.5. A currency swap has a remaining life of 15 months. It involves exchanging interest at 14% on 20 million for interest at 10% on $30 million once a year. The term structure of interest rates in
6.4. Explain what a swap rate is. What is the relationship between swap rates and par yields?
6.3. A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, six-month LIBOR is exchanged for 12% per annum (compounded semiannu- ally). The average of the
An investor enters into a short forward contract to sell 100,000 for $1.5000 per . How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.4900 and (b) 1.5200?
Suppose that you write a put contract on AOL Time Warner with a strike price of $40 and an expiration date in three months. The current stock price of AOL Time Warner is $41. What have you committed
It is now July 2001. A mining company has just discovered a small deposit of gold. It will take six months to construct the mine. The gold will then be extracted on a more or less continuous basis
Suppose that a March call option with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a gain? Under what circumstances will the
Suppose that a June put option with a strike price of $60 costs $4 and is held until June. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option
An investor writes a September call option with a strike price of $20. It is now May, the stock price is $18, and the option price is $2. Describe the investor's cash flows if the option is held
Discuss how foreign currency options can be used for hedging in the situation described in Table 1.3 so that (a) ImportCo is guaranteed that its exchange rate will be less than 1.5300, and (b)
The Chicago Board of Trade offers a futures contract on long-term Treasury bonds. Characterize the investors likely to use this contract.
The price of gold is currently $500 per ounce. Forward contracts are available to buy or sell gold at $700 for delivery in one year. An arbitrageur can borrow money at 10% per annum. What should the
On May 8, 2000, an investor owns 100 Cisco shares. As indicated in Table 1.2 the share price is 62 and an October put option with a strike price 50 costs 4. The investor is comparing two alternatives
28.15 What are the important characteristics of short-term marketable securities?
28.14 Anthony Marino, CFO of Thousand Years Inc., is evaluating two alternatives of float management: lockbox and concentration banking. The average number of daily payments to lockboxes is 250 with
28.13 The Miller Company has an agreement with the First National Bank by which the bank handles $4 million in collections each day and requires a $500,000 compensating balance. Miller is
28.12 The Walter Company disburses checks every two weeks that average $200,000 in total and take three days to clear. How much cash can the Walter Company save annually if it delays the transfer of
28.11 It takes the Herman Company about seven days to receive and deposit checks from customers. The top management of the Herman Company is considering a lockbox system.It is expected that the
28.10 Each business day, on average, a company writes checks totaling $12,000 to pay its suppliers. The usual clearing time for these checks is five days. Each day, the company receives payments from
28.9 A large New England lumber producer, Salisbury Stakes, Inc., is planning to use a lockbox system to speed collections from its customers located in the midwestern United States. A Chicago-area
28.8 Garden Groves, Inc., a Florida-based company, has determined that a majority of its customers are located in the New York City area. Therefore, it is considering using a lockbox system offered
28.7 Gold Star Co. and Silver Star Co. both manage their cash flows according to the Miller-Orr model. Gold Star’s daily cash flow is controlled between $100,000 and $200,000, whereas Silver
28.6 The variance of the daily net cash flows for the Tseneg Asian Import Company is $1.44 million. The opportunity cost to the firm of holding cash is 8 percent per year. The fixed cost of buying
28.5 Lisa Tylor, CFO of Purple Rain Co., concluded from the Baumol model that the optimal cash balance for the firm is $20 million. The annual interest rate on marketable securities is 7.5 percent.
28.4 The Casablanca Piano Company is currently holding $800,000 in cash. It projects that over the next year its cash outflows will exceed its cash inflows by $345,000 per month. Each time securities
28.3 A company’s weekly average cash balances are as follows:Week 1 $24,000 Week 2 34,000 Week 3 10,000 Week 4 15,000 If the annual interest rate is 12 percent, what return can be earned on the
28.2 Indicate whether the following actions increase, decrease, or cause no change in a company’s cash balance.a. Interest rates paid on money-market securities rise.b. Commissions charged by
28.1 What are the reasons for holding cash?
• Why do firms find themselves with idle cash?• What are the types of money-market securities?
• Suppose an overzealous financial manager writes checks on uncollected funds. Aside from legal issues, who is the financial loser in this situation?
• What are lockboxes? Concentration banks? Wire transfers?
• Describe collection and disbursement float.
• What are the strengths and weaknesses of the Baumol model and the Miller-Orr model?
• What is a target cash balance?
• What is a compensating balance?
• What is the transactions motive, and how does it lead firms to hold cash?
30.6 The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in
30.10 Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its
30.13 Company A is contemplating acquiring company B. Company B’s projected revenues, cost, and required investment appear in the table that follows. The table also shows sources for financing
31.3 When the Beacon Computer Company (BCC) filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code, it had the following balance sheet:As trustee, what distribution of liquidating value do
31.4 When the Master Printing Company filed for bankruptcy, it filed under Chapter 11 of the U.S. Bankruptcy Code. Its balance sheet is shown below:As trustee, what reorganization plan would you
1. What if the pound traded for DM4 in Frankfurt and $1.60 in London? If the dollar traded for DM2 in Frankfurt, the trader would have a triangular opportunity.Starting with $1.60, a trader could
• What is the law of one price? What is purchasing-power parity?
• What is the relationship between inflation and exchange-rate movements?
• What is the interest-rate-parity theorem?
• Why is the forward rate related to the expected future spot rate?
• How can one offset foreign exchange risk through a transaction in the forward markets?
• What problems do international projects pose for the use of net-present-value techniques?
• What issues arise when reporting foreign operations?
32.1 Use Table 32.5 to answer the following questions:a. What is the quote in direct terms for the British pound sterling and the U.S. dollar on spot exchange? What is it in European terms for the
32.2 Determine whether arbitrage opportunities exist given the following foreign exchange rates. a. $1.8/L DM2/$ DM4/L b. 100/$ DM2/$ 50/DM c. HKD7.8/$ 100/$ 14/HKD
32.3 Are the following statements true or false? Explain.a. If the general price index in Japan rises faster than that in the United States (assuming that there are zero transaction costs, that no
32.4 The inflation rates for Empire White and Empire Black are 5 percent and 10 percent, respectively. At the beginning of the year, the spot rate between the two currencies is 2.5 black dollars per
32.5 A U.S. corporation, Forever Young, Inc., intends to import $1,000,000 worth of cosmetics from France and will make payment in FF three months from now. The foreign exchange spot rate of French
32.6a. The treasurer of a major U.S. firm has $5 million to invest for three months. The annual interest rate in the United States is 12 percent. The interest rate in the United Kingdom is 9 percent.
32.7a. Suppose it is your task to evaluate two different investments in new subsidiaries for your company, one in your own country and the other in a foreign country. You calculate the cash flows of
32.8a. What is a Euroyen?b. If financial markets are perfectly competitive and the Eurodollar rate is above that offered in the U.S. loan market, you would immediately want to borrow money in the
31.6 Why do so many firms file for legal bankruptcy when private workouts are so much less expensive?
31.5 Explain the following two terms.a. APRb. DIP
31.2 What are some benefits of financial distress?
31.1 Define financial distress using the stock-based and flow-based approaches.
• What is the main benefit of prepackaged bankruptcy?
• What is prepackaged bankruptcy?
• Why do firms use formal bankruptcy?
• What are two ways a firm can restructure its finances?
• What is bankruptcy?
30.14 List the defensive tactics commonly used by target-firm managers to resist unfriendly takeover attempts.
30.8 Refer to the Global Resources example in section 30.8 of the text. Suppose that instead of 40 shares, Global exchanges 100 of its shares for the 100 shares of Regional. The new Global Resources
30.3 Keep the assumptions of 30.2. Construct the balance sheet for the new corporation. Use the pooling-of-interests method to treat the transaction.
30.2 Suppose the balance sheet for Philadelphia Pretzel in problem 30.1 shows the assets at their book value and not their market value of $240,000. Construct the balance sheet for the new
• What is a benefit of a keiretsu?
• Can you describe a keiretsu?
• What does the evidence say about the benefits of mergers and acquisitions?
• In an efficient market with no tax effects, should an acquiring firm use cash or stock?
• What is the difference between purchase accounting and pooling-of-interests accounting?
• What is a merger? How does a merger differ from other forms of acquisition?
29.12 The factoring department of Inter American Bank (IAB) is processing 100,000 invoices per year with average invoice value of $1,500. IAB buys the accounts receivable at 4 percent off the invoice
29.11 The Allen Company has monthly credit sales of $600,000. The average collection period is 90 days. The cost of production is 70 percent of the selling price. What is the Allen Company’s
29.10 Major Electronics sells 85,000 personal stereos each year at a price per unit of $55. All sales are on credit; the terms are 3/15, net 40. The discount is taken by 40 percent of the customers.
29.9 What is the information commonly used to assess creditworthiness of a client?
29.8 In principle, how should we decide the optimal credit policy?
29.7 The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 300 cycles. The average cost to the shop of a cycle is
29.6 Fast Typing Co. is in the business of manufacturing and selling Fast-Line Typewriters. It does not offer any credit sales currently. The per unit price and cost of each Fast-Line typewriter are
29.5 The Theodore Bruin Corporation, a manufacturer of high-quality stuffed animals, does not extend credit to its customers. A study has shown that, by offering credit, the company can increase
29.3 The Tropeland Company has obtained the following information:Annual credit sales = $30 million Collection period= 60 days Terms: Net 30 Interest rate = 12%The company is considering offering
29.2 The Webster’s Company sells on credit terms of net 45. Its accounts are on average 45 days past due. If annual credit sales are $5 million, what is the company’s balance in accounts
29.1 The North County Publishing Company has provided the following data:Annual credit sales = $10 million Average collection period = 60 days Terms: Net 30 Interest rate = 10%North County
• What tools can a manager use to analyze a collection policy?
• List the factors that influence the decision to grant credit.
• What considerations enter into the determination of the terms of sale?
26.9 What are the shortcomings of financial-planning models that we should be aware of?
26.8 Atlantic Transportation Co. has a payout ratio of 60 percent, debt-equity ratio of 50 percent, return on equity of 16 percent, and an assets-sales ratio of 175 percent.a. What is its sustainable
26.6 Throughout this text, you have learned that financial managers should select positive netpresent-value projects. How does this project-selection criterion relate to financialplanning models?
26.5 The MBI Company does not want to grow. The company’s financial management believes it has no positive NPV projects. The company’s operating financial characteristics are Profit margin =
26.3 The Stieben Company has determined that the following will be true next year:T = Ratio of total assets to sales = 1 P = Net profit margin on sales = 5%d = Dividend-payout ratio = 50%L =
26.2 Cheryl Colby, the CFO of Charming Florist Ltd. has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow at 10 percent to the level of $330 million.
• What are the determinants of growth?

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