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Finance Students' Problem Set

This document contains assignments from a finance textbook. It includes 3 problems about convertible bond values, 4 questions about call option profits and risks compared to stock purchases, 3 questions about the tax benefits of acquiring a company with tax losses to carry forward, 2 questions about exchange rate movements between euros and dollars, and an ethics problem about paying bribes versus maximizing shareholder wealth. The assignments cover a range of finance topics and calculations including convertible bonds, call options, taxes, exchange rates, and business ethics.

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36 views2 pages

Finance Students' Problem Set

This document contains assignments from a finance textbook. It includes 3 problems about convertible bond values, 4 questions about call option profits and risks compared to stock purchases, 3 questions about the tax benefits of acquiring a company with tax losses to carry forward, 2 questions about exchange rate movements between euros and dollars, and an ethics problem about paying bribes versus maximizing shareholder wealth. The assignments cover a range of finance topics and calculations including convertible bonds, call options, taxes, exchange rates, and business ethics.

Uploaded by

NJUE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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M8 ASSIGNMENTS

P17–9 Conversion (or stock) value What is the conversion (or stock) value of each of the
following convertible bonds?

1. A $1,000-par-value bond that is convertible into 25 shares of common stock. The


common stock is currently selling for $50 per share.
2. A $1,000-par-value bond that is convertible into 12.5 shares of common stock. The
common stock is currently selling for $42 per share.
3. A $1,000-par-value bond that is convertible into 100 shares of common stock. The
common stock is currently selling for $10.50 per share.

P17–20 Call option Carol Krebs is considering buying 100 shares of Sooner Products Inc. at $62
per share. Because she has read that the firm will probably soon receive certain large orders from
abroad, she expects the price of Sooner to increase to $70 per share. As an alternative, Carol is
considering purchase of a call option for 100 shares of Sooner at a strike price of $60. The 90-
day option will cost $600. Ignore any brokerage fees or dividends.

1. What will Carol’s profit be on the stock if its price does rise to $70?
2. How much will Carol earn on the option if the stock price rises to $70?
3. How high must the stock price rise for Carol to break even on the option?
4. Compare, contrast, and discuss the relative profit and risk associated with the stock and
the option transactions.

P18–1 Tax effects of acquisition Connors Shoe Company is contemplating the acquisition of
Salinas Boots, a firm that has shown large operating tax losses over the past few years. As a
result of the acquisition, Connors believes that the total pretax profits of the merger will not
change from their present level for 15 years. The tax loss carryforward of Salinas is $800,000,
and Connors projects that its annual earnings before taxes will be $280,000 per year for each of
the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for
application of the tax loss carryforward resulting from the proposed merger (see footnote 2
earlier in this chapter). The corporate tax rate is 21%.

1. If Connors does not make the acquisition, what will be the company’s tax liability and
earnings after taxes each year over the next 15 years?
2. If the acquisition is made, what will be the company’s tax liability and earnings after
taxes each year over the next 15 years?
3. If Salinas can be acquired for $350,000 in cash, should Connors make the acquisition,
judging on the basis of tax considerations? (Ignore present value.)

P19–1 Exchange rate movements Suppose a basket of goods in Paris costs and the same basket
purchased in New York costs $153.

1. At what exchange rate between euros and dollars is the cost of the basket of goods the
same in each city?
2. Now suppose that over the next year inflation in France is expected to be 2% while in the
U.S. the forecast is for 6% inflation. What exchange rate do you expect a year from
today?

P19–6 ETHICS PROBLEM Is there a conflict between maximizing shareholder wealth and
never paying bribes when doing business abroad? If so, how might you explain the firm’s
position to shareholders who are asking why the company does not pay bribes when its foreign
competitors in various nations clearly do so?

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