Corp exercise PDF

Preview

Summary

Exercise chapter 24, 26,28,29...

Description

W10: WARRANTS AND CONVERTIBLES 1. Denise recently issued $2 million worth of 3% convertible debentures. Each convertible bond has a face value of $1000. Each convertible bond can be converted into 21.5 shares of common stock anytime before maturity. The stock price is $32.15, and the market value of each bond is 980 => (a) conversion ratio =21.5; (b) conversion price = par value of bond/ conversion ratio = 1000/21.5; (c) conversion premium = (conversion price – current stock price)/ current stock price ; (d) conversion value = conversion ratio x stock price; (e) if stock price increase by 2$ => new conversion value = conversion ratio x (stock price +2)// 2. Fitness Center, Inc., issued convertible bonds with a conversion price of $75. The bonds are available for immediate conversion. The current price of the company’s common stock is $67/share. The current market price of the convertible bonds is $975. The convertible bonds’ straight value is not known=> (a) the minimum price for convertible bond: conversion ratio = bond par value/ conversion price; conversion value = conversion ratio x stock price. Therefore, the minimum price the bond should sell for is conversion value. Since the bond price is higher than this price, the bond is selling at the straight value, plus a premium for the conversion feature; (b) Explain the difference between the current market price of each convertible bond and the value of the common stock into which it can be immediately converted: A convertible bond gives its owner the right to convert his bond into a fixed number of shares. The market price of a convertible bond includes a premium over the value of immediate conversion that accounts for the possibility of increases in the price of the firm’s stock before the maturity of the bond. If the stock price rises, a convertible bondholder will convert and receive valuable shares of equity. If the stock price decreases, the convertible bondholder holds the bond and retains his right to fixed interest and principal payments// 3. Superior Clamps, Inc., has a capital structure consisting of 7M shares of common stock and 900000 warrants. Each warrant gives its owner the right to purchase 1 share of newly issued common stock for an exercise price of $25. The warrants are European and will expire 1Y from today. MV of the company’s assets is $165M, and the annual variance of the returns on the firm’s assets is 0.2. T-bills that mature in 1Y yield a continuously compounded interest rate of 7%. The company does not pay a div. Use the Black–Scholes model to determine the value of a single warrant => calculate d1 and d2 => C => the price of a single warrant = [n/ (n+nw)]xC

Payments of accounts Wages, taxes & expense Capital expenditure Interest & dividends Total cash disbursement

Total cash collection Total cash disbursement Net CF

Beginning cash balance Net CF Ending cash balance Minimum cash balance Cummulative surplus (deficit)

Q1

Q2

Q3

Q4

43.2 31.5

49.14 27 40 6 122.14

59.76 36.6

57.6 42

6 102.36

6 105.6

6 80.7 Q1 86.5 80.7 5.8 Q1 32 5.8 37.8 -15 22.8

Q2 97.5 122.14 -24.64

Q3 106 102.36 3.64

Q2 37.8 -24.64 13.16 -15 -1.84

Q3 13.16 3.64 16.8 -15 1.8

Q4 131 105.6 25.40 Q4 16.8 24.4 42.2 -15 27.2

W12: CREDIT MANAGEMENT 1. Essence of Skunk Fragrances, Ltd., sells 5750 units of its perfume collection each year at a price/ unit of $445. All sales are on credit with terms of 1/10, net 40. The discount is taken by 35% of the customers => the total amount of the company’s accounts receivable: New ACP = 0.35x 10 +0.65x40= 29.5 days; total annual sales= 445x5750 =2558750; new receivables= 2558750/365 x 29.5; In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 2/10, net 30 to preserve its market share => this change in policy affect accounts receivable : If the firm increases the cash discount, more people will pay sooner, thus lowering the average collection period. If the ACP declines, it will lead to a decrease in the average receivables// 2. Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for 8 high-bypass turbine engines, which increase fuel economy. The variable cost is $2.52M/unit, and the credit price is $2.76M each. Credit is extended for one period, and based on historical W11: SHORT-TERM FINANCE AND PLANNING: experience, payment for about 1 out of every 200 such orders is never collected. The 1. Effect on operating cycle: (a) Receivables average goes up so the time to collect the required return is 2.9%/ period => (a) Assuming that this is a one-time order, should it be receivables would increase, which increases the operating cycle; (b) Credit repayment times filled: 𝑁𝑃𝑉 = −𝑣 + [(1−𝜋)𝑃]>0: company should fill the order; (b) the break-even 1+𝑅 for customers are increased=> customers will take longer to pay their bills, which will lead (1−𝜋 )𝑃 to an increase in the operating cycle; (c) Inventory turnover goes from 3 times to 6 times => probability of default in part (a): 𝑁𝑃𝑉 = −𝑣 + [ 1+𝑅 ] = 0 => 𝜋 so We would not accept the inventory period decreases; (d) Payables turnover goes from 6 times to 11 times: The the order if the default probability was higher than ℼ percent.; (c) Suppose that customers who accounts payable period is part of the cash cycle, not the operating cycle ; (e) Receivables don’t default become repeat customers and place the same order every period forever. turnover goes from 7 times to 9 times => the receivables period decreases; (f) Payments to Further assume that repeat customers never default. Should the order be fille𝒅 𝑁𝑃𝑉 = (1−𝜋)(𝑃−𝑣 ) suppliers are accelerated: affect the accounts payable period, which is part of the cash cycle, −𝑣 [ ] > 0: fill the order; the break-even probability of default: 𝑁𝑃𝑉 = not the operating cycle// 𝑅 2. Calculate operating and cash cycle: The firm is receiving cash on average (cash cycle) days −𝑣 [(1−𝜋)(𝑃−𝑣 ) ] = 0 We would not accept the order if the default probability was higher than ℼ 𝑅 after it pays its bills // percent. This default probability is much higher than in part b because the customer may become 3.Corp’s purchases from suppliers in a quarter are equal to 75% of the next quarter’s a repeat customer; (d) Describe in general terms why credit terms will be more liberal when forecast sales. The payables period is 60D. Wages, taxes, and other expenses are 20% of repeat orders are a possibility: It is assumed that if a person has paid his or her bills in the sales, and interest and dividends are $78/ quarter. No capital expenditures are planned past, they will pay their bills in the future. This implies that if someone doesn’t default when Q1 Q2 Q3 Q4 credit is first granted, then they will be a good customer far into the future, and the possible Sales 1590 1820 1780 1510 gains from the future business outweigh the possible losses from granting credit the first time// Sales for 1st quarter of the following year are projected at $1860 => Fill the table: 3. (v=v’) Royal, Inc., is considering a change in its cash-only sales policy. The new terms Payables each period = 60/90 of last quarter’s orders + 30/90 of this quarter’s orders = of sale would be net one month. Based on the following information, determine if the 2/3(.75) times current sales + 1/3(.75) next period sales// company should proceed or not. Describe the buildup of receivables in this case. The 4. Sales for 1st quarter of the year after this one are projected at $120M. Accounts required return is 0.95 percent per month receivable at the beginning of the year were $34M. Wildcat has a 45-day collection period. Current Policy New Policy Wildcat’s purchases from suppliers in a quarter are equal to 45% of the next quarter’s Price/ unit 680 680 forecast sales, and suppliers are normally paid in 36 days. Wages, taxes, and other Cost/ unit 455 455 expenses run about 30% of sales. Interest and dividends are $6M/ quarter. Wildcat plans Unit sales/ month 1070 1120 a major capital outlay in the second quarter of $40 million. Finally, the company started Cost of switching: v(Q’-Q)+PQ= 455(1120-1070) + 680*1070 =750350; Benefit of switching= the year with a $32M cash balance and wishes to maintain a $15M minimum balance. (P-v)(Q’-Q)=(680-455)(1120-1070)=11250; NPV = 11250/0.95% - 750350=433860.52 => The Q1 Q2 Q3 Q4 firm will have to bear the cost of sales for one month before they receive any revenue from Sales 105 90 122 140 credit sales, which is why the initial cost is for one month. Receivables will grow over the one A 45-day collection period means sales collections each quarter are: Collections = 45/90 current month credit period and will then remain stable with payments and new sales offsetting one sales + 45/90 old sales; A 36-day payables period means payables each quarter are: Payables = another// (90-36)/90 current orders + 36/90 old orders = 3/5 (0.45) next period sale + 2/5 (0.45) current 4. (v=v’)The Tradition Corporation is considering a change in its cash-only policy. The sales new terms would be net one period. Based on the following information, determine if Q1 Q2 Q3 Q4 Harrington should proceed or not. The required return is 2.4 percent per period. Beginning receivables 34 52.5 45 61 Current Policy New Policy Sales 105 90 122 140 Price/ unit 93 97 Collection of account 34+105/2 = 86.5 105/2+90/2 106 131 Cost/ unit 44 44 Ending receivables 86.5-34= 52.5 97.5-52.5 61 70 Unit sales/ month 2675 2720

Cost of switching: v(Q’-Q)+PQ= 44(2720-2675)+93*44=6072; Benefit of switching= (P’v’)Q’ - (P-v)Q = (97-44)2720- (93-44)2675=13085; NPV = 13085/2.4% - 6072=539136.33// 5. Patton Corp currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend? The required return is .95 percent per month. Current Policy New Policy Price/ unit 283 291 Cost/ unit 223 226 Unit sales/ month 1095 1125 Cost of switching: [PQ + Q(v’ – v) + v’(Q’ – Q)]= 283*1095 + 1095(226-223) + 226(11251095)=319950; Benefit of switching= (P’-v’)Q’ - (P-v)Q = (291-226)1125 – (283-223)1095 =7425; NPV = 7425/0.95% - 319950=461628.95 W14: MERGER AND ACQUISITION 1. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flow by $1.15 million indefinitely. The current market value of Teller is $24 million, and that of Penn is $67 million. The appropriate discount rate for the incremental cash flows is 11 percent. Penn is trying to decide whether it should offer 32 percent of its stock or $33 million in cash to Teller’s shareholders. (a) the cost of each alternative: The cost of cash offered = the amount of cash offered = 24 million. The cost of stock offered = 0.32 (67million + 24 million + 1.15milliom/0.08)= 32465454.55; (b) The NPV of each alternative: The value of Teller to Penn = 24million + 1.15million/ 0.11= 34454545.45. NPV of cash offered = The value of Teller to Penn – Cost of cash offered = 34454545.45 – 33000000. NPV of stock offered = 34454545.45- 32465454.55; (c) Alternative Penn should choose: higher NPV- Since the NPV is greater with the stock offer, the acquisition should be done with stock 2. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $12,700. Firm B Firm T Shares outstanding 8700 3600 Price per share 47 19 (a) If Firm T is willing to be acquired for $21 per share in cash, what is the NPV of the merger: NPV of the merger = Synergy - (Cash paid – MV of acquired firm)= 12700 – (3600x21 – 3600x19) = 5500; (b) What will the price per share of the merged firm be assuming the conditions in (a): Price per share = (MV of acquiring firm + NPV of the merger) / number of shares= (8700x47 +5500)/8700=47.63; (c) In part (a), what is the merger premium: The merger premium = Cash paid – MV of acquired firm = 3600x21 – 3600x19 = 7200; (d) Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for every two of T’s shares, what will the price per share of the merged firm be : Total number of shares after merger = 8700 + 3600/2 = 10500 shares. The value of merged firm = 8700x47 + 3600x19 + synergy (16700)=494000. Price per share = 494000/10500=47.05; (e) What is the NPV of the merger assuming the conditions in (d): NPV of the merger = Synergy - (Cash paid – MV of acquired firm) = 12700 – (3600/2 x 47.05 – 3600x19) 3. Fly-By -Night Couriers is analyzing the possible acquisition of Flashin-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By -Night show that the purchase would increase its annual aftertax cash flow by $445,000 indefinitely. The current market value of Flash-in-the-Pan is $7.8 million. The current market value of FlyBy-Night is $29 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By Night is trying to decide whether it would offer 25 percent of its stock or $11.4 million in cash to Flash-in -the-Pan. (a) What is the synergy from the merger: The synergy = incremental CF/ R = 445000/0.08=5562500; (b) What is the value of Flash-in-the-Pan to FlyBy-Night: The value = MV of Flash + synergy = 7800000+5562500=13362500; (c) What is the cost to Fly-By -Night of each alternative : The cost of cash offered = 11.4 million. The cost of stock offered = 0.25 (29million + 7.8million + 445000/0.08)=10590625; (d) What is the NPV to Fly-By -Night of each alternative: NPV of cash offered = 13362500 – 11.4million. NPV of stock offered = 13362500- 10590625. (e) What alternative should Fly-By -Night use : higher NPV- The acquirer should make the stock offer since its NPV is greater...