UNIT VIII ASSESSMENT ( FINANCE )
Bholman22
unit_viii_assessment__finance_.docx1. What are some reasons why a horizontal merger might create value for shareholders?
(Select all the choices that apply.)
A.Horizontal mergers are more likely to create value for acquiring shareholders.
B.Horizontal mergers combine two firms in the same industry.
C.Horizontal mergers combine two firms in dissimilar industries.
D.A horizontal merger provides for greater potential synergies in eliminating redundant functions within the two firms and potentially increased pricing power with both vendors and customers.
2. Your company has earnings per share of $4.00. It has 1.0 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2.00, 1.0 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. If companies in the same industry as TargetCo are trading at multiples of 14 times earnings, what would be one estimate of an appropriate premium for TargetCo?
(Select from the drop-down menus.)
TargetCo has $2.00 in earnings, so if other companies in its industry are trading at 14
times earnings, then a starting point for a valuation of TargetCo in this transaction might be
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$28.00
$28.10
$27.90
per share, implying a
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12.4%
12.0%
11.6%
premium.
3. BAD Company's stock price is $30, and it has 4.0 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 21%. Assume that BAD has a poison pill with a 15% trigger. If triggered, all target shareholderslong—other than the acquirerlong —will be able to buy one new share in BAD for each share they own at a 75% discount. Assume that the price remains at $30 while you are acquiring your shares. If BAD's management decides to resist your buyout attempt, and you cross the 15% threshold of ownership
a. How many new shares will be issued and at what price?
Number of new shares issued is . (Round to the nearest integer.)
The shares will be issued at $ per share. (Round to the nearest cent.)
b. What will happen to your percentage ownership of BAD Co.?
The percentage ownership will be %. (Round to two decimal places.)
c. What will happen to the price of your shares of BAD Co.?
The new stock price will be $ . (Round to two decimal places.)
d. Do you lose or gain from triggering the poison pill?
The gain (loss) is $ . (Round to the nearest dollar, positive if gain, negative if loss, zero if neither.)
If you lose, where does the loss go (who benefits)? If you gain, where does the gain come from (who loses)?
Every other shareholder in the target firm gains $ per share. (Round to the nearest cent.)
4. What inherent characteristic of corporations creates the need for a system of checks on manager behavior?
(Select the best choice below.)
A.Corporate managers are by nature greedy and cannot be trusted in any way. Therefore, a system of checks, created by the Board of Directors, is normally instituted to control managerial behavior.
B.The best method of reducing conflicts of interest between shareholders and corporate managers is to allow the shareholders the ability to run the corporation themselves. It is more efficient and provides a drastic reduction in conflicts of interest.
C.The corporation allows for the separation of management and ownership. Thus, those who control the operations of the corporation and how its money is spent are not the same who have invested in the corporation. This creates a clear conflict of interest and this conflict between the investors and managers creates the need for investors to devise a system of checks on managers-the system of corporate governance.
D.There really is no need to have a system of corporate governance. If shareholders are not satisfied with the management of a company they can simply sell their shares in that company.
5. What role do security analysts play in monitoring?
Select the best choice below.)
A.Make it more difficult to monitor management because they monopolize the gathering of information.
B.Increase the amount of monitoring because they investigate firms.
C.Make it more difficult to monitor because they like to hype their favorite stocks.
D.No role.
6. How can a proxy contest be used to overcome a captured board?
(Select all of the choices that apply.)
A.Proxy contests are simply contested elections for directors. In a proxy contest, there are two competing slates of directors rather than just one slate proposed by the company.
B.If a board has become captured or unresponsive to shareholder demands, shareholders can put their own slate of new directors up for election.
C.If the dissident slate wins, then the CEO will have succeeded in placing new directors, presumably not beholden to the CEO, on the board.
D.If the dissident slate wins, then shareholders will have succeeded in placing new directors, presumably not beholden to the CEO, on the board.
E.If a board has become captured or unresponsive to shareholder demands, the CEO can put a slate of new directors up for
election.
7. Many of the provisions of the Sarbanes-Oxley Act of 2002 were aimed at auditors. How does this affect corporate governance?
All of the following statements regarding the Sarbanes-Oxley Act of 2012 view of auditors are true, EXCEPT: (Select the best choice below.)
A.Sarbanes-Oxley included measures designed to reduce conflicts of interest among auditors and to increase the penalties for fraud.
B.Auditors are important to corporate governance. Auditors ensure that the financial picture of the firm presented to outside investors is clear and accurate.
C.Sarbanes-Oxley included measures designed to reduce conflicts of interest among auditors by reducing the penalties for fraud.
D.Part of the role of auditors is to detect financial fraud before it threatens the viability of the firm.
8. Genentech's main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of $400 million in the event of a major earthquake disrupting its operations. The chance of such an earthquake is 2.0% per year, with a beta of −0.45.
a. If the risk-free interest rate is 5.5%, and the expected return of the market is 11.0%,
what is the actuarially fair insurance premium to cover Genentech's loss?
The actuarially fair insurance premium to cover Genentech's loss is $ million. (Round to two decimal places.)
b. Suppose the insurance company raises the premium by an additional 8% 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?
The amount of financial distress or issuance costs is $ million. (Round to two decimal places.)
9. Your firm faces a(n) 9% chance of a potential loss of $10 million next year. If your firm implements new policies, it can reduce the chance of the loss to 4%, but these new policies have an upfront cost of $100,000. Suppose the beta of the loss is 0, and the risk-free interest rate is 5%.
a. If the firm is uninsured, what is the NPV of implementing the new policies?
The NPV of implementing the new policies is $. (Round to the nearest dollar.)
b. If the firm is fully insured, what is the NPV of implementing the new policies?
The NPV of implementing the new policies is $ . (Round to the nearest dollar.)
c. Given your answer to (b), what is the actuarially fair cost of full insurance?
The actuarially fair cost of full insurance is $ . (Round to the nearest dollar.)
d. What is the minimum-size deductible that would leave your firm with an incentive to implement the new policies?
The minimum-size deductible is $ million. (Round to three decimal places.)
e. What is the actuarially fair price of an insurance policy with the deductible in part (d)?
The actuarially fair price of an insurance policy is $ .(Round to the nearest dollar.)
10. Your utility company will need to buy 120,000 barrels of oil in 10 days time, and it is worried about fuel costs. Suppose you go long 120 oil futures contracts, each for 1,000 barrels of oil, at the current futures price of $60.00 per barrel. Suppose futures prices change each day as follows ( SEE ATTACHED )
a. What is the mark-to-market profit or loss (in dollars) that you will have on each date?
Calculate the mark-to-market profit or loss below: (Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Profit/Loss |
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$59.50 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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$57.50 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Day |
Price |
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3 |
$57.75 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Profit/Loss |
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$58.00 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Price |
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Price Change |
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Profit/Loss |
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5 |
$59.50 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Price |
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Profit/Loss |
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6 |
$60.50 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Day |
Price |
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Price Change |
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Profit/Loss |
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7 |
$60.75 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Day |
Price |
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Price Change |
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Profit/Loss |
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8 |
$59.75 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Price |
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Price Change |
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Profit/Loss |
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$61.75 |
$ |
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$ |
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(Round price change to the nearest cent and profit or loss to the nearest dollar.)
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Day |
Price |
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$62.50 |
$ |
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b. What is your total profit or loss after 10 days? Have you been protected against a rise in oil prices? (Select from the drop-down menus.)
Summing the daily profit/loss amounts, the total is a gain of
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$300,000
$330,000
$360,000
.
This gain offsets your increase in cost from the overall
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$2.75
$2.50
$3.00
increase in oil prices over the 10 days, which increases your total cost of oil by
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$360,000
$300,000
$330,000
.
c. What is the largest cumulative loss you will experience over the 10-day period? In what case might this be a problem? (Select all the choices that apply.)
A.After the second day, you have lost a total of
$ 240 comma 000$240,000.
B.After the second day, you have lost a total of
$ 300 comma 000$300,000.
C.After the third day, you have lost a total of
$ 270 comma 000$270,000.
D.This loss could be a problem if you do not have sufficient resources to cover the loss. In that case, your position would have been liquidated on day 2, and you would have been stuck with the loss and had to pay the higher cost of oil on day
1010.
11. Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $109,000
in three months time when the installation will occur. However, it insists on paying in Polish zloty (PLN). You don't want to lose the deal (the company is your first client!), but are worried about the exchange rate risk. In particular, you are worried the zloty could depreciate relative to the dollar. You contact Fortis Bank in Poland to see if you can lock in an exchange rate for the zloty in advance. You find the following table posted on the bank's Web site, showing zloty per dollar, per euro, and per British pound:
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1 week |
2 weeks |
1 month |
2 months |
3 months |
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USD |
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purchase |
3.1416 |
13.1431 |
3.1414 |
3.1395 |
3.1342 |
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sale |
3.1761 |
3.1779 |
3.1783 |
3.1767 |
3.1709 |
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EUR |
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purchase |
3.7804 |
3.7814 |
3.7836 |
3.7871 |
3.7906 |
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sale |
3.8214 |
3.8226 |
3.8254 |
3.8298 |
3.8342 |
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a. What exchange rate could you lock in for the zloty in three months?
You could lock in an exchange rate of zloty per U.S. dollar in three months time through a forward contract with the bank. (Round to four decimal places.)
How many zloty should you demand in the contract to receive $109,000?
You would need to write the contract for zloty. (Round to the nearest integer.)
b. Given the bank forward rates in part (a), were short-term interest rates higher or lower in Poland than in the United States at the time?
Thus, the zloty interest rate is
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below
above
the dolar interest rate. (Select from the drop-down menu.)
How did Polish rates compare to euro or pound rates? Explain. (Select from the drop-down menus.)
In general, from the covered interest parity formula, we can tell which rate is higher by seeing if the forward rate is above or below the spot rate. From the table, the forward rates appear to be
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lower
higher
for the British pound, so the pound interest rate was
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lower
higher
at
the time of these quotes. The euro forward rates are
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higher
lower
than
the spot rates, however, suggesting that Polish interest rates were
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higher
lower
than
those for the euro.
12. Suppose the current exchange rate is $ 1.80 divided by pound$1.80/£, the interest rate in the United States is 5.25%, the interest rate in the United Kingdom is 4.00%, and the volatility of the $/£ exchange rate is 10.0%. Use the Black-Scholes formula to determine the price of a six-month European call option on the British pound with a strike price of $ 1.80 divided by pound$1.80/£
The corresponding forward exchange rate is
$ /pound£. (Round to four decimal places.)
Using the Black-Scholes formula d 1d1 is , while N 1N1 is .
(Round to four decimal places.)
Using the Black-Scholes formula d 2d2 is , while N 2N2 is .
(Round to four decimal places.)
The price of the call is $ /pound£. (Round to four decimal places.)
13. You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn's balance sheet is as follows (in millions of dollars):
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Assets |
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Liabilities |
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Cash reserves |
50.0 |
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Checking and savings |
80.0 |
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Auto loans |
100.0 |
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Certificates of deposit |
100.0 |
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Mortgages |
150.0 |
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Long-term financing |
100.0 |
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Total Assets |
300.0 |
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Total liabilities |
280.0 |
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Owner's equity |
20.0 |
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Total liabilities and equity |
300.0 |
When you analyze the duration of loans, you find that the duration of the auto loans is 2.0 years, while the mortgages have a duration of 7.0 years. Both the cash reserves and the checking and savings accounts have a zero duration. The CDs have a duration of 2.0 years, and the long-term financing has a 10.0-year
duration.
a. What is the duration of Acorn's equity?
The duration of the assets is years. (Round to two decimal places.)
The duration of the liabilities is years. (Round to two decimal places.)
The duration of the equity is years. (Round to two decimal places.)
b. Suppose Acorn experiences a rash of mortgage prepayments, reducing the size of the mortgage portfolio from $150.0 million to $100.0 million, and increasing cash reserves to $100.0
million.
What is the duration of Acorn's equity now?
The duration of the assets is years. (Round to two decimal places.)
The duration of the equity is years. (Round to two decimal places.)
If interest rates are currently 4% and were to fall to 3%,
estimate the approximate change in the value of Acorn's equity. (Assume interest rates are APRs based on monthly compounding.)
We would expect the value of Acorn's equity to
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drop
rise
by approximately %. (Round to two decimal places.)
c. Suppose that after the prepayments in part (b), but before a change in interest rates, Acorn considers managing its risk by selling mortgages and/or buying 10-year
Treasury STRIPS (zero coupon bonds). How many should the firm buy or sell to eliminate its current interest rate risk? (Select from the drop-down menu.)
They should
▼
sell
buy
$ million worth of 10-year STRIPS. (Round to two decimal places.)
