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##### final exam accounting probs - Fairweather Corporation purchases merchandise on terms of 2/15

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Question;Question 1.1.;Fairweather Corporation purchases merchandise on terms of;2/15, net 40, and its gross purchases (i.e., purchases before taking off the;discount) are $800,000 per year. What is;the maximum dollar amount of costly trade credit the firm could get, assuming it;abides by the supplier?s credit terms?;(Assume a 365-day year.);(Points: 15);$53,699;$56,384;$59,203;$62,163;$65,271;Question 2.2.;A U.S. based importer, Zarb Inc., makes a purchase of;crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or;$24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days;and the U.S. firm wants to cover this trade payable with a forward market hedge;to eliminate its exchange rate risk.;Suppose the firm completes a forward hedge at the 90-day forward rate of;1.682 francs. If the spot rate in 90;days is actually 1.638 francs, how much will the U.S. firm have saved or lost;in U.S. dollars by hedging its exchange rate exposure?;(Points: 15);-$396;-$243;$0;$243;$638;Question 3.3.;Suppose 90-day investments in Britain have a 6% annualized;return and a 1.5% quarterly (90-day) return.;In the U.S., 90-day investments of similar risk have a 4% annualized;return and a 1% quarterly (90-day) return.;In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the;spot exchange rate?;(Points: 15);1 pound =;$1.8000;1 pound =;$1.6582;1 pound =;$1.0000;1 pound =;$0.8500;1 pound =;$0.6031;Question 4.4.;Preissle Company?s stock sells for $42 per share. The company wants to sell some 20-year;annual interest, $1,000 par value bonds.;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 par?;(Points: 15);7.83%;8.24%;8.65%;9.08%;9.54%;Question 5.5.;Mikkleson Mining 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%.;The stock currently sells for $40.00 a share, has an expected dividend;in the coming year of $2.00, and has an expected constant growth rate of;5.00%. What is the estimated floor price;of the convertible at the end of Year 3?;(Points: 15);$794.01;$835.81;$879.80;$926.10;$972.41;Question 6.6.;Potter & Lopez Inc. just sold a bond with 50 warrants;attached. The bonds have a 20-year maturity and an annual coupon of 12%, and;they were issued at their $1,000 par value. The current yield on similar;straight bonds is 15%. What is the implied value of each warrant?;(Points: 15);$3.76;$3.94;$4.14;$4.35;$4.56;Question 7.7. Arthouse Inc., a national artist supply chain;is considering purchasing a smaller chain, Craftworks Inc. Arthouse's analysts project that the merger;will result in incremental free flows and interest tax savings with a combined;present value of $72.52 million, and they have determined that the appropriate;discount rate for valuing Craftworks is 16%.;Craftworks has 4 million shares outstanding and no debt. Craftwork's current price is $16.25. What is the maximum price per share that;Arthouse should offer? (Points: 15);$16.25;$16.97;$17.42;$18.13;$19.00;Question 8.8. Kelly Tubes is considering a merger with;Reilly Tires. Reilly?s market-determined;beta is 0.9, and the firm currently is financed with 20% debt, at an interest;rate of 8%, and its tax rate is 25%. If;Kelly acquires Reilly, it will increase the debt to 60%, at an interest rate of;9%, and the tax rate will increase to 35%.;The risk-free rate is 6% and the market risk premium is 4%. What will Reilly?s required rate of return on;equity be after it is acquired? (Points: 15);7.4%;8.9%;9.3%;9.6%;9.7%;Question 9.9.;Company A can issue floating-rate debt at LIBOR + 1%, and it;can issue fixed rate debt at 9%. Company;B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate;debt at 9.4%. Suppose A issues;floating-rate debt and B issues fixed-rate debt, after which they engage in the;following swap: A will make a fixed 7.95%;payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and;B?;(Points: 15);A pays a;fixed rate of 9%, B pays LIBOR + 1.5%.;A pays a;fixed rate of 8.95%, B pays LIBOR + 1.45%.;A pays LIBOR;plus 1%, B pays a fixed rate of 9.4%.;A pays a;fixed rate of 7.95%, B pays LIBOR.;None of the above answers is correct.;Question 10.10. Suppose the December CBOT Treasury bond;futures contract has a quoted price of 80-07.;If annual interest rates go up by 1.00 percentage point, what is the;gain or loss on the futures contract?;(Assume a $1,000 par value, and round to the nearest whole dollar.);(Points: 15);-$78.00;-$82.00;-$86.00;-$90.00;-$95.00;Question 11.11.;Arnold Inc. purchases merchandise on terms of 2/10 net 30;and it always pays on the 30th day. The;CFO calculates that the average amount of costly trade credit carried is;$375,000. What is the firm's average;accounts payable balance? Assume a;365-day year.;(Points: 30);Question 12.12.;Delamont Trucking Company (DTC) is evaluating a potential;lease for a truck with a 4-year life that costs $40,000 and falls into the;MACRS 3-year class. If the firm borrows;and buys the truck, the loan rate would be 10%, and the loan would be amortized;over the truck?s 4-year life, so the interest expense for taxes would decline;over time. The loan payments would be;made at the end of each year. The truck;will be used for 4 years, at the end of which time it will be sold at an;estimated residual value of $10,000. If;DTC buys the truck, it would purchase a maintenance contract that costs $1,000;per year, payable at the end of each year.;The lease terms, which include maintenance, call for a $10,000 lease;payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy? Show all computations. (Note;MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.);(Points: 30)Question 13.13.;McGovern Enterprises is interested in issuing bonds with;warrants attached. The bonds will have a 30-year maturity and annual interest;payments. Each bond will come with 20 warrants that give the holder the right;to purchase one share of stock per warrant. The investment bankers estimate;that each warrant will have a value of $10.00. A similar straight-debt issue would;require a 10% coupon. What coupon rate should be set on the bonds-with-warrants;so that the package would sell for $1,000?;(Points: 30);Question 14.14.;Palmer Company has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an;annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a;premium of $50 per bond. If the bonds;are called, the company must pay flotation costs of $10 per new refunding;bond. Ignore tax considerations--assume;that the firm's tax rate is zero.;The company's decision of whether to call the bonds depends;critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate;below which it would be profitable to call in the bonds?;(Points: 30);Question 15.15.;Raymond Supply, a national hardware chain, is considering;purchasing a smaller chain, South Georgia Parts (SGP). Brau's analysts project that the merger will;result in the following incremental free cash flows, tax shields, and horizon;values;Year;1 2 3;4;Free cash flow;$1 $3 $3;$7;Unlevered horizon value 75;Tax shield;1 1 2;3;Horizon value of tax shield 32;Assume that all;cash flows occur at the end of the year.;SGP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately;and if it is undertaken, SGP would retain its current $15 million of debt and;issue enough new debt to continue at the 30% target level. The interest rate would remain the same. SGP's pre-merger beta is 2.0, and its;post-merger tax rate would be 34%. The;risk-free rate is 8% and the market risk premium is 4%. What is the value of SGP to Brau?;(Points: 30)

Paper#42842 | Written in 18-Jul-2015

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