1. a) Kern Corporation entered into an agreement with its investment banker to sell 15 million shares of the company's stock with Kern netting $300 million from the offering. The expected price to the public was $25 per share.
b. What profit or loss would the investment banker realize if the issue were sold to the public at an average price of $20 per share?
c. Is the agreement between the company and its investment banker an example of a negotiated or a best-efforts deal? Why? Which is riskier to the company? Why?
2. Shown below are exchange rates for several currencies.
|
$ per 1 euro
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$ per 1 franc
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Peso per $1
|
|
|
Spot rate
|
1.33
|
1.08
|
12.8
|
|
|
30-day forward rate
|
1.31
|
1.11
|
13.1
|
|
|
60-day forward rate
|
1.29
|
1.22
|
13.9
|
|
a) Is the EURO appreciating or depreciating against the US dollar? Explain.
b) b. Is the Swiss franc appreciating or depreciating against the U.S. dollar? Why?
c) Is the Mexican peso appreciating or depreciating against the U.S. dollar? Why?
d. Using cross-rates, based on the spot rate, how many francs will the euro buy, how many pesos will the franc buy, and how many euro will the peso buy?
e. A U.S. company purchases goods from several foreign companies with payment due in euros, francs, and pesos. Would the company be better off paying now or waiting for 60 days? Why?
3. Calhoun Resorts is interested in developing a new facility in Toronto. The company estimates that the hotel would require an initial investment of $10 million. The company expects that the facility will produce positive cash flows of $3,000,000 a year at the end of each of the next 5 years. The project's cost of capital is 12%.
a. Calculate the expected net present value of the project.
b) A hotel tax may be imposed that would affect cash flows. In one year, the company expects to know whether the tax will be imposed. The company believes there is a 40% change that the tax will be imposed, in which case annual cash flows will be $2.5 million. If the tax is not imposed, annual cash flows will be $3.2 million . It is deciding whether to proceed with the facility today or to wait 1 year to find out whether the tax will be imposed. If it waits a year, the initial investment will remain at $10 million, and incoming cash flows will be delayed 1 year. Cost of capital will remain at 12%.
b) If the company waits one year, calculate the project's NPV in Year 1 with restrictions and without restrictions.
c. Identify 3 qualitative factors in addition to the value of the real option that the company should consider in making its decision.
4. Epoty Corporation is evaluating whether to lease or purchase needed equipment at a cost of $100,000. If the equipment is leased, the lease would not have to be capitalized. The company's balance sheet prior to the acquisition of the equipment is shown below.
a. Calculate the company's current debt ratio?
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Equipment cost
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$100,000
|
|
|
|
|
|
|
|
Current Balance Sheet
|
|
Current assets
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300,000
|
Debt
|
400,000
|
|
Net Fixed assets
|
600,000
|
Equity
|
500,000
|
|
Total assets
|
900,000
|
Total claims
|
900,000
|
a. Current debt ratio
b. Calculate the company's debt ratio if it purchases the equipment with debt.
c. Calculate the company's debt ratio if it leases the equipment?
d. Will the company's ROA and ROE ratios be affected by its decision to lease or purchase? Why or why not?
e. What factors should the company consider in coming to its decision other than net advantage to leasing? Why?