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business
introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

Which organizational forms give their owners limited liability?AppendixLO1
What does the phrase limited liability mean in a corporate context?AppendixLO1
What is the most important difference between a corporation and all other organizational forms?AppendixLO1
What is blockchain technology, and how might it be useful in finance?AppendixLO1
In what ways has the finance industry been on the cutting edge of technology in the past?AppendixLO1
Why are people who post limit orders termed “providers” of liquidity?AppendixLO1
What is the limit order book?AppendixLO1
What are the important changes that have occurred in stock markets over the last decade?AppendixLO1
How may a corporate bankruptcy filing affect the ownership of a corporation?AppendixLO1
What is a principal-agent problem that may exist in a corporation?AppendixLO1
What are the three main tasks of a financial manager?AppendixLO1
What are the advantages and disadvantages of organizing a business as a corporation?AppendixLO1
What is a limited liability company (LLC)? How does it differ from a limited partnership?AppendixLO1
One fi rm can acquire another in several different ways. The three legal forms of acquisition are merger and consolidation, acquisition of stock, and acquisition of assets. Mergers and consolidations
The synergy from an acquisition is defi ned as the value of the combined fi rm (VAB) less the value of the two fi rms as separate entities (VA and VB):Synergy VAB (VA VB)The shareholders of the
The possible benefi ts of an acquisition come from the following:a. Revenue enhancement.b. Cost reduction.c. Lower taxes.d. Reduced capital requirements. LO.1
Stockholders may not benefi t from a merger that is done only to achieve diversifi cation or earnings growth. And the reduction in risk from a merger may actually help bondholders and hurt
A merger is said to be friendly when the managers of the target support it. A merger is said to be hostile when the target managers do not support it. Some of the most colorful language of fi nance
The empirical research on mergers and acquisitions is extensive. On average, the shareholders of acquired fi rms fare very well. The effect of mergers on acquiring stockholders is less clear. LO.1
Mergers and acquisitions involve complicated tax and accounting rules. Mergers and acquisitions can be taxable or tax-free transactions. In a taxable transaction each selling shareholder must pay
In a going-private transaction, a buyout group, usually including the fi rm’s management, buys all the shares of the other stockholders. The stock is no longer publicly traded. A leveraged buyout
Merger Accounting Explain the difference between purchase and pooling of interests accounting for mergers. What is the effect on cash fl ows of the choice of accounting method?On EPS? LO.1
Merger Rationale Explain why diversifi cation per se is probably not a good reason for merger. LO.1
Corporate Split In May 2005, high-end retailer Nieman Marcus announced plans to sell off its private label credit card business. Unlike other credit cards, private label credit cards can be used only
Poison Pills Are poison pills good or bad for stockholders? How do you think acquiring fi rms are able to get around poison pills? LO.1
Merger Profi t Acquiring fi rm stockholders seem to benefi t little from takeovers. Why is this fi nding a puzzle? What are some of the reasons offered for it? LO.1
Calculating Synergy Evan, Inc., has offered $740 million cash for all of the common stock in Tanner Corporation. Based on recent market information, Tanner is worth $650 million as an independent
Balance Sheets for Mergers Consider the following premerger information about fi rm X and fi rm Y:Firm X Firm Y Total earnings $40,000 $15,000 Shares outstanding 20,000 20,000 Per-share values:Market
Balance Sheets for Mergers Assume that the following balance sheets are stated at book value. Construct a postmerger balance sheet assuming that Jurion Co. purchases James, Inc., and the pooling of
Incorporating Goodwill In the previous problem, suppose the fair market value of James’s fi xed assets is $12,000 versus the $5,600 book value shown. Jurion pays $17,000 for James and raises the
Balance Sheets for Mergers Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a pooling of
Incorporating Goodwill In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of
Cash versus Stock Payment Penn Corp. is analyzing the possible acquisition of Teller Company.Both fi rms have no debt. Penn believes the acquisition will increase its total aftertax annual cash fl
EPS, PE, and Mergers The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each fi rm is given here:Flannery Stultz Price–earnings
Cash versus Stock as Payment Consider the following premerger information about a bidding fi rm (fi rm B) and a target fi rm (fi rm T). Assume that both fi rms have no debt outstanding.Firm B Firm T
Effects of a Stock Exchange Consider the following premerger information about fi rm A and fi rm B:Firm A Firm B Total earnings $900 $600 Shares outstanding 550 220 Price per share $ 40 $ 15 Assume
Merger NPV Show that the NPV of a merger can be expressed as the value of the synergistic benefi ts, V, less the merger premium. LO.1
Merger NPV Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither fi rm has debt. The forecasts of Fly-By-Night show that the purchases would increase
Merger NPV Harrods PLC has a market value of £600 million and 30 million shares outstanding.Selfridge Department Store has a market value of £200 million and 20 million shares outstanding. Harrods
Calculating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp.Plant’s vice president of fi nance has collected the following information:Plant Palmer Price–earnings ratio
Mergers and Shareholder Value 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
Suppose Hybrid shareholders will agree to a merger price of $68.75 per share. Should Birdie proceed with the merger? LO.1
What is the highest price per share that Birdie should be willing to pay for Hybrid? LO.1
Suppose Birdie is unwilling to pay cash for the merger but will consider a stock exchange.What exchange ratio would make the merger terms equivalent to the original merger price of $68.75 per
What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger? LO.1
Financial distress is a situation where a fi rm’s operating cash fl ow is not suffi cient to cover contractual obligations. Financially distressed fi rms are often forced to take corrective action
Financial restructuring can be accomplished with a private workout or formal bankruptcy. Financial restructuring can involve liquidation or reorganization. However, liquidation is not common. LO.1
Corporate bankruptcy involves Chapter 7 liquidation or Chapter 11 reorganization. An essential feature of the U.S. bankruptcy code is the absolute priority rule. The absolute priority rule states
A new form of fi nancial restructuring is prepackaged bankruptcy. It is a hybrid of a private workout and formal bankruptcy. LO.1
Financial Distress Defi ne fi nancial distress using the stock-based and fl ow-based approaches. LO.1
Financial Distress What are some benefi ts of fi nancial distress? LO.1
Prepackaged Bankruptcy What is prepackaged bankruptcy? What is the main benefi t of prepackaged bankruptcy? LO.1
Financial Distress Why doesn’t fi nancial distress always cause fi rms to die? LO.1
Liquidation versus Reorganization What is the difference between liquidation and reorganization? LO.1
APR What is the absolute priority rule? LO.1
DIP Loans What are DIP loans? Where do DIP loans fall in the APR? LO.1
Bankruptcy versus Private Workouts Why do so many fi rms fi le for legal bankruptcy when private workouts are so much less expensive? LO.1
Chapter 7 When the Beacon Computer Company fi led for bankruptcy under Chapter 7 of the U.S. bankruptcy code, it had the following balance sheet information:Liquidating Value Claims Trade credit
Chapter 11 When the Master Printing Company fi led for bankruptcy, it fi led under Chapter 11 of the U.S. bankruptcy code. Key information is shown here:Assets Claims Mortgage bonds $10,000 Senior
An American depositary receipt (ADR) is a security issued in the United States that represents shares of a foreign stock, allowing that stock to be traded in the United States. Foreign companies use
The cross-rate is the implicit exchange rate between two currencies (usually non-U.S.) when both are quoted in some third currency, usually the U.S. dollar. LO.1
A Eurobond is a bond issued in multiple countries but denominated in a single currency, usually the issuer’s home currency. Such bonds have become an important way to raise capital for many
Eurocurrency is money deposited in a fi nancial center outside of the country whose currency is involved. For instance, Eurodollars—the most widely used Eurocurrency—are U.S. dollars deposited in
Foreign bonds, unlike Eurobonds, are issued in a single country and are usually denominated in that country’s currency. Often, the country in which these bonds are issued will draw distinctions
Gilts, technically, are British and Irish government securities, although the term also includes issues of local British authorities and some overseas public-sector offerings. LO.1
The London Interbank Offer Rate (LIBOR) is the rate that most international banks charge one another for overnight loans of Eurodollars in the London market.LIBOR is a cornerstone in the pricing of
There are two basic kinds of swaps: interest rate and currency. An interest rate swap occurs when two parties exchange a fl oating-rate payment for a fi xed-rate payment or vice versa. Currency swaps
Importers who pay for goods using foreign currencies. LO.1
Exporters who receive foreign currency and may want to convert to the domestic currency. LO.1
Portfolio managers who buy or sell foreign stocks and bonds. LO.1
Foreign exchange brokers who match buy and sell orders. LO.1
Traders who “make a market” in foreign currencies. LO.1
Speculators who try to profi t from changes in exchange rates. LO.1
The transaction costs of trading apples—shipping, insurance, spoilage, and so on—must be zero. LO.1
There must be no barriers to trading apples—no tariffs, taxes, or other political barriers. LO.1
Finally, an apple in New York must be identical to an apple in London. It won’t do for you to send red apples to London if the English eat only green apples. LO.1
Some basic vocabulary: We briefl y defi ned some exotic terms such as LIBOR and Eurocurrency. LO.1
The basic mechanics of exchange rate quotations: We discussed the spot and forward markets and how exchange rates are interpreted. LO.1
The fundamental relationships between international fi nancial variables:a. Absolute and relative purchasing power parity, PPP.b. Interest rate parity, IRP.c. Unbiased forward rates, UFR.Absolute
International capital budgeting: We showed that the basic foreign exchange relationships imply two other conditions:a. Uncovered interest parity.b. The international Fisher effect.By invoking these
Exchange rate and political risk: We described the various types of exchange rate risk and discussed some common approaches to managing the effect of fl uctuating exchange rates on the cash fl ows
Yankee Bonds Which of the following most accurately describes a Yankee bond?a. A bond issued by General Motors in Japan with the interest payable in U.S. dollars.b. A bond issued by General Motors in
Exchange Rates Are exchange rate changes necessarily good or bad for a particular company? LO.1
Multinational Corporations Given that many multinationals based in many countries have much greater sales outside their domestic markets than within them, what is the particular relevance of their
Exchange Rate Movements Are the following statements true or false? Explain why.a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound
International Borrowing If a U.S. fi rm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in the United States? How would you overcome them? LO.1
Eurobonds What distinguishes a Eurobond from a foreign bond? Which particular feature makes the Eurobond more popular than the foreign bond? LO.1
Using Exchange Rates Take a look back at Figure 31.1 to answer the following questions:a. If you have $100, how many euros can you get?b. How much is one euro worth?c. If you have 5 million euros,
Using Spot and Forward Exchange Rates Suppose the spot exchange rate for the Canadian dollar is Can$1.26 and the six-month forward rate is Can$1.22.a. Which is worth more, a U.S. dollar or a Canadian
Cross-Rates and Arbitrage Suppose the Japanese yen exchange rate is ¥115 = $1, and the British pound exchange rate is £1 $1.70.a. What is the cross-rate in terms of yen per pound?b. Suppose the
Interest Rate Parity Use Figure 31.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 3.8 percent.What must the
Interest Rates and Arbitrage The treasurer of a major U.S. fi rm has $30 million to invest for three months. The annual interest rate in the United States is .45 percent per month. The interest rate
Infl ation and Exchange Rates Suppose the current exchange rate for the Polish zloty is Z 3.84. The expected exchange rate in three years is Z 3.92. What is the difference in the annual infl ation
Exchange Rate Risk Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 31.1. You have just placed an order for 30,000 motherboards at a cost to you
Exchange Rates and Arbitrage Suppose the spot and six-month forward rates on the Norwegian krone are Kr 6.43 and Kr 6.56, respectively. The annual risk-free rate in the United States is 5 percent,
Spot versus Forward Rates Suppose the spot and three-month forward rates for the yen are ¥131.30 and ¥129.76, respectively.a. Is the yen expected to get stronger or weaker?b. What would you
Expected Spot Rates Suppose the spot exchange rate for the Hungarian forint is HUF 215.The infl ation rate in the United States are 3.5 percent per year. They are 8.6 percent in Hungary.What do you
Forward Rates The spot rate of foreign exchange between the United States and the United Kingdom is $1.50/£. If the interest rate in the United States is 13 percent and it is 8 percent in the United
Capital Budgeting You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 27.0 million. The cash fl ows from the project would
American Depositary Receipts Nestlé S. A. has American depositary receipts listed on the over-the-counter market. Many ADRs listed on U.S. exchanges are for fractional shares. In the case of

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