Phoenix Corp. faltered in the recent recession but is recovering.

Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows:

Phoenix’s recovery will be complete by 2024, and there will be no further growth in net income or free cash flow.

a. Calculate the PV of free cash flow, assuming a of 9%.

b. Assume that Phoenix has 12 million shares outstanding. What is the price per share?

c. Confirm that the expected rate of return on Phoenix stock is exactly 9% in each of the years from 2020 to 2024.

Suppose that you are a banker responsible for approving corporate

Suppose that you are a banker responsible for approving corporate loans. Nine firms are seeking secured loans. They offer the following assets as collateral:

a. Firm A, a heating oil distributor, offers a tanker load of fuel oil in transit from the Middle East.

b. Firm B, a wine wholesaler, offers 1,000 cases of Beaujolais Nouveau located in a field warehouse.

c. Firm C, a stationer, offers an account receivable for office supplies sold to the City of New York.

d. Firm D, a bookstore, offers its entire inventory of 15,000 used books.

e. Firm E, a wholesale grocer, offers a boxcar full of bananas.

f. Firm F offers 100 ounces of gold.

g. Firm G, a government securities dealer, offers its of Treasury bills.

h. Firm H, a boat builder, offers a half-completed luxury yacht. The yacht will take four more months to complete.

Which of these assets are most likely to be good collateral? Which are likely to be poor collateral? Explain.

Maple Aircraft has issued a 4¾% convertible subordinated debenture due

Maple Aircraft has issued a 4¾% convertible subordinated debenture due 2023. The conversion price is $47.00 and the debenture is callable at 102.75% of face value. The market price of the convertible is 91% of face value, and the price of the common is $41.50. Assume that the value of the bond in the absence of a conversion feature is about 65% of face value.

a. What is the conversion ratio of the debenture?

b. If the conversion ratio were 50, what would be the conversion price?

c. What is the conversion value?

d. At what stock price is the conversion value equal to the bond value?

e. Can the market price be less than the conversion value?

f. How much is the convertible holder paying for the option to buy one share of common stock?

g. By how much does the common have to rise by 2023 to justify conversion?

Match each of the following terms with one of the

Match each of the following terms with one of the definitions below:

A. Revolving credit

B. Bridge loan

C. Term loan

D. Syndicated loan

E. Commitment fee

F. Maintenance covenant

a. Requirement that borrower keeps in the future to a certain condition—for example, a minimum debt ratio.

b. Rather like a corporate credit card, it allows the company to choose to borrow up to a certain limit and to repay.

c. Loan that is parceled out among a group of banks.

d. Longer term bank loan with a fixed maturity.

e. Fee paid on unused portion of a revolving credit.

f. Short-term bank loan taken out until more permanent funding can be arranged.

In 2017, Entergy paid a regular quarterly dividend of $.89

In 2017, Entergy paid a regular quarterly of $.89 per share.

a. Match each of the following dates.

(A1) Friday, October 27
(A2) Tuesday, November 7
(A3) Wednesday, November 8
(A4) Thursday, November 9
(A5) Friday, December 1
(B1) Record date
(B2) Payment date
(B3) Ex-dividend date
(B4) Last with-dividend date
(B5) Declaration date

b. On one of these dates, the stock price fell by about $.89. Which date? Why?

c. Entergy’s stock price in November 2017 was about $86. What was the yield?

d. Entergy’s forecasted earnings per share for 2017 were about $6.90. What was the payout ratio?

e. Suppose that Entergy paid a 10% stock What would happen to the stock price?

1. If the law firm takes the lease, it will

1. If the law firm takes the lease, it will invest $950,000 and, in effect, borrow $9,050,000, repaid by 19 installments of $950,000. What is the interest rate on this disguised loan?

2. The law firm could finance 80% of the purchase price with a conventional mortgage at a 7% interest rate. Is the conventional mortgage better than the lease?

3. Construct a simple numerical example to convince Drywall that the lease would expose the law firm to financial risk. [Hint: What is the rate of return on the firm’s equity investment in the office building if a recession arrives and the market value of the (leased) office building falls to $9 million after one year? What is the rate of return with conventional mortgage financing? With all-equity financing?]

4. Do the investments in London and Brussels have anything to do with the decision to finance the office building? Explain briefly.

Suppose the present value of the building equals its purchase price of $10 million. Assume that the law firm can finance the offices in London and Brussels from operating cash flow, with cash left over for the lease payments. The firm will not default on the lease payments. For simplicity you can ignore taxes.

A law firm (not Dewey, Cheatem, and Howe) is expanding rapidly and must move to new office space. Business is good, and the firm is encouraged to purchase an entire building for $10 million. The building offers first-class office space, is conveniently located near their most important corporate clients, and provides space for future expansion. The firm is considering how to pay for it. Claxton Drywall, a consultant, encourages the firm not to buy the building but to sign a longterm lease for the building instead. “With lease financing, you’ll save $10 million. You won’t have to put up any equity investment,” Drywall explains.

The senior law partner asks about the terms of the lease. “I’ve taken the liberty to check,” Drywall says. “The lease will provide 100% financing. It will commit you to 20 fixed annual payments of $950,000, with the first payment due immediately.”

“The initial payment of $950,000 sounds like a down payment to me,” the senior partner observes sourly.

“Good point,” Drywall says amiably, “but you’ll still save $9,050,000 up front. You can earn a handsome rate of return on that money. For example, I understand you are considering branch offices in London and Brussels. The $9 million would pay the costs of setting up the new offices, and the cash flows from the new offices should more than cover the lease payments. And there’s no financial risk—the cash flows from the expansion will cover the lease payments with a safety cushion. There’s no reason for you or your partners to worry or to demand a higher-than-normal rate of return.”

Here are key financial data for House of Herring Inc.:Earnings

Here are key financial data for House of Herring Inc.:

Earnings per share for 2025 $5.50

Number of shares outstanding 40 million

Target payout ratio 50%

Planned per share $2.75

Stock price, year-end 2025 $130

House of Herring plans to pay the entire early in January 2026. All corporate and personal taxes were repealed in 2024.

a. Other things equal, what will be House of Herring’s stock price after the planned payout?

b. Suppose the company cancels the and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company’s prospects from the announcement. How many shares will the company need to repurchase?

c. Suppose that, instead of canceling the the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends.

What happens to the with- and ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring’s prospects.

Supply the missing words: “There are three forms of the

Supply the missing words: “There are three forms of the efficient-market hypothesis. Tests of randomness in stock returns provide evidence for the form of the hypothesis. Tests of stock price reaction to well-publicized news provide evidence for the form, and tests of the performance of professionally managed funds provide evidence for the form. Market efficiency results from competition between investors. Many investors search for new information about the company’s business that would help them to value the stock more accurately. Such research helps to ensure that prices reflect all available information; in other words, it helps to keep the market efficient in the form. Other investors study past stock prices for recurrent patterns that would allow them to make superior profits.

Such research helps to ensure that prices reflect all the information contained in past stock prices; in other words, it helps to keep the market efficient in the form.”

Suppose that Sudbury Mechanical Drifters is proposing to invest $10

Suppose that Sudbury Mechanical Drifters is proposing to invest $10 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 40%, and the is 10%.

a. What is the present value of Sudbury’s depreciation tax shields?

b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point to straight-line. Now what is the present value of the depreciation tax shields?

c. What would be the present value of the tax shield if the government allowed Sudbury to write-off the factory immediately?

1. Calculate the NPV of the proposed investment, using the

1. Calculate the NPV of the proposed investment, using the inputs suggested in this case. How sensitive is this NPV to future sales volume?

2. What are the pros and cons of waiting for a year before deciding whether to invest? What happens if demand turns out high and Sparky-Cola also invests? What if Ecsy-Cola invests right away and gains a one-year head start on Sparky-Cola?

Libby Flannery, the regional manager of Ecsy-Cola, the international soft drinks empire, was reviewing her investment plans for Central Asia. She had contemplated launching Ecsy-Cola in the ex-Soviet republic of Inglistan in 2022. This would involve a capital outlay of $20 million in 2021 to build a bottling plant and set up a system there. Fixed costs (for manufacturing, and marketing) would then be $3 million per year from 2021 onward. This would be sufficient to make and sell 200 million liters per year—enough for every man, woman, and child in Inglistan to drink four bottles per week! But there would be few savings from building a smaller plant, and import tariffs and transport costs in the region would keep all production within national borders.

The variable costs of production and would be 12 cents per liter. Company policy requires a rate of return of 25% in nominal dollar terms, after local taxes but before deducting any costs of financing. The sales revenue is forecasted to be 35 cents per liter.

Bottling plants last almost forever, and all unit costs and revenues were expected to remain constant in nominal terms. Tax would be payable at a rate of 30%, and under the Inglistan corporate tax code, capital expenditures can be written off on a straight-line basis over four years.

All these inputs were reasonably clear. But Ms. Flannery racked her brain trying to forecast sales. Ecsy-Cola found that the “1–2–4” rule works in most new markets. Sales typically double in the second year, double again in the third year, and after that remain roughly constant. Libby’s best guess was that, if she went ahead immediately, initial sales in Inglistan would be 12.5 million liters in 2023, ramping up to 50 million in 2025 and onward.

Ms. Flannery also worried whether it would be better to wait a year. The soft drink market was developing rapidly in neighboring countries, and in a year’s time she should have a much better idea whether Ecsy-Cola would be likely to catch on in Inglistan. If it didn’t catch on and sales stalled below 20 million liters, a large investment probably would not be justified.

Ms. Flannery had assumed that Ecsy-Cola’s keen rival, Sparky-Cola, would not also enter the market. But last week she received a shock when in the lobby of the Kapitaliste Hotel she bumped into her opposite number at Sparky-Cola. Sparky-Cola would face costs similar to Ecsy-Cola.

How would Sparky-Cola respond if Ecsy-Cola entered the market? Would it decide to enter also?

If so, how would that affect the profitability of Ecsy-Cola’s project?

Ms. Flannery thought again about postponing investment for a year. Suppose Sparky-Cola were interested in the Inglistan market. Would that favor delay or immediate action?

Maybe Ecsy-Cola should announce its plans before Sparky-Cola has a chance to develop its own proposals. It seemed that the Inglistan project was becoming more complicated by the day.