Assignment
1. Which of the following statements is most CORRECT?
A. If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).
B. If a firm "stretches" (i.e., delays paying) its accounts payable, then other things held constant, this will lengthen its cash conversion cycle (CCC).
C. If a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.
D. As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
E. If a firm carries a constant amount of receivables as sales decline, then, other things held constant, this will reduce its cash conversion cycle (CCC).
2. Which of the following statements is CORRECT, holding other things constant?
A. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
B. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
C. Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.
D. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.
E. Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity
3. If the one-year forward rate implied by the Interest Rate Parity is F($/£)= 1.20, and the quotation you received from your bank is F($/£)= 1.23, you can take advantage of this arbitrage opportunity by taking a _______position in pound under the one-year forward contract with the bank, and also borrow in ___________to construct the arbitrage portfolio.
A. long; pound
B. long; dollar
C. short; pound
D. short; dollar
4. Freeman Builders, Inc. buys on terms of 2/15, net 30. What is the nominal cost of trade credit? The effective cost? Assume a 365-day year.
5. Merriwether Building has operating income of $20 million, a tax rate of 40%, and no debt. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $40 per share, and it has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40% debt and 60% equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10%. If this plan were carried out, what would be PP's new value of operations?How many shares remain after the repurchase, and what is the stock price per share immediately after the repurchase?
6. A company forecasts the free cash flow of $400 for year 1 and $600 for year 2. After year 2 the FCF will grow at a constant rate of 5%. The company also forecasts the tax saving from interest deduction is $200 for year 1 and $100 and for year 2. After year 2 the tax saving will grow at a constant rate of 5%.The unlevered cost of equity is 10%
a) What is the horizon value of operation at year 2?
b) What is the current unlevered value of operation?
c) What is the horizon value of tax shield at year 2?
d) What is the current value of tax shield?
e) What is the current levered value of operation?
7. Using the table below to answer question a-c
|
Country
|
In US $
|
|
UK Pound
|
2.0000
|
|
1-mos forward
|
2.0100
|
|
3-mos forward
|
2.0200
|
|
6-mos forward
|
2.0300
|
|
Euro
|
1.5000
|
|
1-mos forward
|
1.5100
|
|
3-mos forward
|
1.5200
|
|
6-mos forward
|
1.5300
|
a. What is the 3-month forward cross-exchange rate between pounds and euro F3(£/€)?
b. ABC Company, which is a U.S. firm, sells merchandise today to a French company for €100,000, the account is payable in one months, and the firm wants to hedge against the unfavorable future exchange rate with forward contact, what transaction does it need to take? What is the amount of dollar payment received in one month?
c. Suppose ABC Company also has to pay £100,000 to its supplier in one month, what transaction does it need to take in order to hedge against unfavorable future exchange rate? What is the amount of dollar payment made in one month?
8. A U.S. company has the opportunity to invest in a manufacturing facility in Great Britain for 3 years. The company need to spend £20 million initially , and the expected net cash flow for the next three years, in millions, are CF1=£8, CF2=£9, CF3=£10. Risk-adjusted cost of capital for a similar U.S. project is 10%. The spot exchange rate is $1.5/£, and interest rate on U.S. and U.K. government bonds are shown below. What is the NPV of this project?
|
Maturity (years)
|
1
|
2
|
3
|
|
i$
|
2.0%
|
2.8%
|
3.5%
|
|
i£
|
4.6%
|
5.0%
|
5.2%
|
9. Suppose a company has a pre-IPO value of 100 million, has 40 million existing shares, and needs 18.6 million in net proceeds, and the investment bank charges a 7% spread. What is the offer price?
10. PreissleCompany, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at $1,000?
11. Mikkleson Mining stock is selling for $40 per share and has an expected constant growth rate of 5.00%. The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. What is the estimated floor price of the convertible at the end of Year 2?
12. The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a residual dividend policy, what is its forecasted dividend payout ratio?