^ A group of questions ... (corporate finance)

HI V : MODULE 3 - FINANCING & CAPITAL STRUCTURE (30 MARKS) 1) An income bond holder receives interest payments only if the firm makes income. If the firm does not make interest payments in a year, the interest is cumulated and paid in the first year the firm makes income. A preferred stock receives preferred dividends only if the firm makes income. If a firm does not make preferred dividend payments in a year, the dividend is cumulated and paid in the first year the firm makes income. Are income bonds really preferred stock? What are the differences? For purposes of calculating debt how would you differentiate between income bonds and regular bonds? 2 2) You are analyzing a new security that has been promoted as equity, with the following features: The dividend on the security is fixed in dollar terms for the life of the security, which is 20 years. The dividend is not tax deductible. In the case of default, the holders of this security will receive cash only after all debt holders, secured as well as unsecured, are paid. The holders of this security will have no voting rights. Based upon the description of debt and equity in the chapter, how would you classify this security? If you were asked to calculate the debt ratio for this firm, how would you categorize this security? 3) You have been asked to calculate the debt ratio for a firm that has the following components to its financing mix The firm has 1 million shares outstanding, trading at $ 50 per share. The firm has $ 25 million in straight debt, carrying a market interest rate of 8%. The firm has 20,000 convertible bonds outstanding, with a face value of $1000, a market value of $1100, and a coupon rate of 5%. Estimate the debt ratio for this firm. . R Qa ... 4) Zycor Corporation obtains most of its funding internally. Assume that the stock has a beta of 1.2, the riskless rate is 6.5% and the market risk premium is 6%. a) Estimate the cost of internal equity. b) Now assume that the cost of issuing new stock is 5% of the proceeds. Estimate the cost of external equity. 3 MODULE 4 (DIVIDEND POLICY) 1. What options does a firm have to spend its free cash flow (after it has satisfied all interest obligations)? 2. ABC Corporation announced that it will pay a dividend to all shareholders of record as of Monday, April 2, 2012. It takes three business days of a purchase for the new owners of a share of stock to be registered. a) When is the last day an investor can purchase ABC stock and still get the dividend payment? b) When is the ex-dividend day? 3. Describe the different mechanisms available to a firm to use to repurchase shares. 4. RFC Corp. has announced a $1 dividend. If RFC's price last price cum-dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)? 5. KMS Corporation has assets with a market value of $422 million, $36 million of which are cash. It has debt of $186 million and 18 million shares outstanding. Assume perfect capital markets. a) What is its current stock price? b) If KMS distributes $36 million as a dividend, what will its share price be after the dividend is paid? c) If instead, KMS distributes $36 million as a share repurchase, what will its share price be once the shares are repurchased? d) What will its new market debt-equity ratio be after either transaction? MODULE 5 (RISK MANAGEMENT) 6. Why might a large, multinational company choose to insure against common events, such as vehicle accidents, but not against rare events which could cause large losses? Explain briefly. 7. "The farmer does not avoid risk by selling wheat futures. If wheat prices stay about $2.80 a bushel, then he will actually have lost by selling wheat futures at $2.50." Is this a fair comment? 8. List some of the commodity futures contracts that are traded on exchanges. Who do you think could usefully reduce risk by buying each of these contracts? Who do you think might wish to sell each contract? 4 9. Genentech's main facility is in South San Francisco. Suppose that Genentech would experience a direct loss of $450 million in the event of a major earthquake that disrupted its operations. The chance of such an earthquake is 2% per year, with a beta of -0.5. a) If the risk-free interest rate is 5% and the expected return of the market is 10%, what is the actuarially fair insurance premium required to cover Genentech's loss? b) Suppose the insurance company raises the premium by an additional 15% over the amount calculated in part (a) to cover its administrative and overhead costs. What amount of financial distress or issuance costs would Genentech have to suffer if it were not insured to justify purchasing the insurance? I Q & Q b) Suppose the insurance company raises the premium by an additional 15% over the amount calculated in part (a) to cover its administrative and overhead costs. What amount of financial distress or issuance costs would Genentech have to suffer if it were not insured to justify purchasing the insurance? MODULE 6 (INTERNATIONAL FINANCE) 10. Spot and Forward Rates: Suppose the exchange rate for the Swiss franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market. a) Is the dollar selling at a premium or a discount relative to the franc? b) Does the financial market expect the franc to strengthen relative to the dollar? Explain. c) What do you suspect is true about relative economic conditions in the United States and Switzerland? 11. Purchasing Power Parity: Suppose the rate of inflation in Mexico will run about 3 percent higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the Mexican peso versus dollar exchange rate? What relationship are you relying on in answering