Reference no: EM1318544

1.      Name two financing options that are available to corporations. What are the benefits and disadvantages of each?

2.      Credit Scoring. Discuss the problems with developing a numerical credit scoring system for evaluating personal loans. You can only test your system using data for applicants who have in the past been granted credit. Is this a potential problem?

3.      Bond Pricing.Suppose that the J.C. Penney bond was issued at face value and that investors continue to demand a yield of 8.25%. Sketch what you think would happen to the bond price as the first interest payment date approaches and then passes. What about the price of the bond plus accrued interest?

4.      Tax and Leasing. We showed that the lease offered to Greymore Bus Lines had a positive NPV of $820 if Greymore paid no tax and a +$700 NPV to a lessor paying 35% tax. What is the minimum lease payment the lessor could accept under these assumptions? What is the maximum amount the Greymore could pay?

	0	1.00	2.00	3.00	4.00	5.00	6.00	7.00
cost of new bus	100
lost depreciation tax shield		-7.00	-11.20	-6.74	-4.03	-4.03	-2.02	0.00
lease payment	-16.9	-16.90	-16.90	-16.90	-16.90	-16.90	-16.90	-16.90
tax shield of lease payment	5.92	5.92	5.92	5.92	5.92	5.92	5.92	5.92
cash flow of lease	89.02	-17.99	-22.19	-17.71	-15.02	-15.02	-13.00	-10.99

 

                                i.            Greymore does not have to pay for the bus. This is equivalent to a cash inflow of $100,000.

                              ii.            Greymore no longer owns the bus and cannot depreciate it. Therefore it gives up a valuable depreciation tax shield. We have assumed depreciation would be calculated using the five-year MACRS depreciation schedule.

                            iii.            Greymore must pay $16,900 per year for eight years to the lessor. The first payment is due immediately.

                            iv.            However, these lease payments are fully tax-deductible. At a 35% marginal tax rate, the lease payments generate tax shields of $5, 920 per year. You could say that the after-tax cost of the least payment is $16, 900 - $5, 920 = $10, 980.

 

5.      Describe two types of risks that are seen in financial markets.  How can managers minimize these risks?

6.      Interest rate swaps. A year ago a bank entered into $50 million five-year interest rate swap. It agreed to pay company each year a fixed rate of 6% and to receive in return LIBOR. When the bank entered into this swap, LIBOR was 5% but now interest rates have risen, so on a four year interest rate swap the bank could expect to pay 6.5% and receive LIBOR.

a)      Is the swap showing a profit or loss to the bank?

b)     Suppose that at this point company approaches the bank and asks to terminate the swap. Is there are four annual payments still remaining? How much should the bank charge the company to terminate?

7.      Insurance. Large businesses spend millions of dollars annually on insurance. Why? Should they insure against all risks or does insurance make more sense for some risks than others? 

8.      Interest rate and exchange rates. Penny Farthing, the treasurer of International Bicycles, Inc. has noticed that the interest rate in Japan is below the rates in most other countries. She is, therefore, suggesting that the company should make an issue of Japanese yen bonds. Does this makes sense?

9.      Currency risk. In January 2012, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend.  A year later she sells the shares for 550 pesos each. The exchange rates when she buys the stock are shown in Table 27.1. Suppose the exchange rate at the time sale is 15.7 pesos = $1.

Table 27.1 (Exchange rate)

	Abbreviation	Spot Rate	1 month	3 month	1 year
Mexico (Pesos)	MXN	12.9495	12.9814	13.0495	13.3785

 

a)      How many dollars does she invest?

b)      What is her total return in pesos? In dollars?

c)      Do you think that she has made an exchange rate profit of loss? Explain.