managerial

Explain what hostile takeover is referred to and how it is carried out.

A merger transaction that the target firm's management does not support, forcing the acquiring company to try to gain control of the firm by buying shares in the marketplace

Specify the difference of convertible, warrant, and right.

Both result in new equity capital, although the warrant provides for deferred equity financing The life of a right is typically not more than a few months; a warrant is generally exercisable for a period of years Rights are issued at a subscription price below the prevailing market price of the stock; warrants are generally issued at an exercise price 10 to 20 percent above the prevailing market price The exercise of a warrant shifts the firm's capital structure to a less highly leveraged position because new common stock is issued without any change in debt

Specify the difference between call and put options.

Call option: option to purchase a specified number of shares of a stock (typically 100) on or before a specified future date at a stated price. Strike Price: Price at which the holder of the option can buy the underlying stock. Put Option: An option to sell a specified number of shares of a stock (typically 100) on or before a specified future date at a stated strike price.

Specify the advantages and disadvantages of issuing a convertible bond.

Cheaper, lower coupon rate

Distinguish between congeneric merger and conglomerate merger.

Congeneric Merger- firms in the same general industry but is neither in the same line of business nor a supplier or customer Conglomerate Merger- A merger of firms in unrelated business

WHich have impact on company capital leverage:

Convertible bond, Debt increase but when converted it decreases

Specify the characteristics of various hybrid securities, including preferred stock, convertible bond, and stock purchase warrant.

Convertible bond: can be changed into a number of shares of common stock. Conversion Ratio: ratio at which investors can exchange a convertible security for common stock. Conversion Price = Par Value of Convertible Security / Conversion Ratio Conversion Ratio = Par Value / Conversion Price Conversion Value = Conversion Ratio * Current Market Price of Firm's Stock EPS = earnings available for common stockholders / # of shares outstanding

Specify different types of lease arrangements, including direct lease, leverage lease, and sale-leaseback. (4 scenarios and match them up)

Direct Lease: Lessor owns assets that is leased to given lessee. Sale-leaseback Arrangement: Lessor acquire leased asset by purchasing assets already owned by the lessee and leases it back. Leveraged Lease: Lessor acts as equity participant, supplies about 20% of the cost, lender supplies the balance. Popular for very expensive assets.

Explain different types of divestiture, including spin-off, split-off, and carve-out.

Divestiture: The selling of some of a firm's assets. Spin-off: When an operating unit becomes an independent company by issuing shares in the divested operating unit on a pro rata basis to the parent company's shareholders. Carve Out: A parent company first sells a portion of the shares of a subsidiary in an IPO to establish a market price for the new company. LAter, the parent company distributes the remaining shares of the new company to the parent-company shareholders on a pro rata basis.

Calculate the implied value of a stock purchase warrant.

Implied price of all warrants=Price of bond with warrants attached−Straight bond value

Specify the advantages and disadvantages of leasing from the lessee's perspective

In many leases, the return to the lessor is quite high; the firm might be better off borrowing to purchase the asset. The terminal value of an asset, if any, is realized by the lessor. If the lessee had purchased the asset, it could have claimed its terminal value. Of course, an expected terminal value, when recognized by the lessor, results in lower lease payments. The lessee is generally prohibited from making improvements on the leased property or asset without the lessor's approval. However, lessors generally encourage leasehold improvements when these are expected to enhance the asset's salvage value. If a lessee leases an asset that subsequently becomes obsolete, it still must make lease payments over the remaining term of the lease. This condition is true even if the asset is unusable.

Specify what a leverage buyout is referred to and the characteristic of an attractive candidate for acquisition through a leverage buyout.

Leveraged Buyout (LBO): involves use of large amount of debt to purchase a firm. Typically 90% of purchase price is financed with debt. It must have a good position in its industry, with a solid profit history and reasonable expectations of growth. The firm should have a relatively low level of debt and a high level of "bankable" assets that can be used as loan collateral. It must have stable and predictable cash flows that are adequate to meet interest and principal payments on the debt and provide adequate working capital.

Capital Lease:

Longer term, noncanceable. Common when businesses need land, buildings, or large equipment. Similar to long-term debt. Asset appears on firm's balance sheet and is depreciated over time as if asset is owned. Total payments of lessee are larger than the lessor's initial cost of investment.

Calculate the market value of a convertible bond.

Market Price x Conversion Ratio

Specify the main motives for Specify the main motives for merger.

Maximization of the owners' wealth maximization of the owners wealth as reflected in the acquirer's share price. Growth, diversification, synergy, fund raising, increased management skill or tech, tax considerations, increased ownership liquidity, and defence against takeover Strategic merger: Achieve economies of scale Financial Merger: Improve cash flow

Specify the possible causes of business failure.

Returns are negative or low Insolvency: when a firm is unable to pay its liabilities as they come due. (liquidity crisis) Bankruptcy: A legal process in which a court declares that a firm cannot meet its financial obligations and establishes a procedure for resolving that situation. Mismanagement: overexpansion, poor financial actions, an ineffective sales force, and high productions costs. Economic activity - downturns. Recession -> decreased sales -> high fixed costs and insufficient revenues to cover them. Deficient product development.

Calculate the straight bond value of the convertible.

Straight Bond Value: Price floor of convertible bond = Present Value of Bond's interst and principal payments discounted at the interest rate the firm would have to pay on a non convertible bond.

Distinguish between financial merger and strategic merger.

Strategic Merger- A transaction in attempt to achieve economies of scale Financial Merger- Transaction used to improve cash flow for the frim

Explain why in the lease versus buy decision, leasing is often preferable.

Tax advantages, expensing payments, Problem #1 With Capital Lease: Interest (Understate) , Principal (Overstate from financing activities), Depre (Look on PP) Operating: Only lease payment,

Specify the advantages and of leasing from the lessee's perspective. Advantages:

The firm may avoid the cost of obsolescence. This advantage is especially true in the case of operating leases, which generally have relatively short lives. A lessee avoids many of the restrictive covenants (such as minimum liquidity, subsequent borrowing, and cash dividend payments) that are normally included as part of a long-term loan but are not normally found in a lease agreement. In the case of low-cost assets that are infrequently acquired, leasing—especially operating leases—may provide the firm with needed financing flexibility. The firm does not have to arrange other financing for these assets. Sale-leaseback arrangements may permit the firm to increase its liquidity by converting an existing asset into cash. This conversion can benefit a firm that is short of working capital or in a liquidity bind. Leasing allows the lessee, in effect, to depreciate land,which would be prohibited if the land were purchased. Because the lessee who leases land is permitted to deduct the total lease payment as an expense for tax purposes, the effect is the same as if the firm had purchased the land and then depreciated it. Because leasing may not increase the assets or liabilities on the firm's balance sheet, leasing may result in misleading financial ratios. Understating assets and liabilities can cause certain ratios, such as the total asset turnover, to look better than they might be. With the adoption of FASB Statement No. 13, this advantage no longer applies to financial leases, although it remains a potential advantage for operating leases. Leasing provides 100% financing. Most loan agreements for the purchase of fixed assets require a down payment; thus the borrower is able to borrow only 90% to 95% of the purchase price of the asset. In the case of bankruptcy or reorganization, the maximum claim of lessors against the corporation is 3 years of lease payments. If debt is used to purchase an asset, the creditors have a claim that is equal to the total outstanding loan balance.

Specify the characteristics of stock purchase warrants.

Theoretical Value of a Warrant: TVW = (P0 - E) * N P0= Current market price of a share of common stock E= Exercise price of the warrant N= # of shares of common stock obtainable with one warrant Warrant Premium= the amount by which the market value of a warrant exceeds the theoretical value

Specify the key motives for divestiture.

To generate cash for expansion of other product lines, to get rid of a poorly performing operation, to streamline the corporation, or to restructure the corporation's business in a manner consistent with its strategic goals.

Distinguish between vertical merger and horizontal merger

Vertical Merger- A merger in which the firm acquires a customer or supplier Horizontal Merger- Two firms in the same line of business

Explain what overhanging issue facing with convertibles is referred to.

When a convertible security cannot be forced into a conversion using the call feature, Investor doesnt have intention to convertible because receving interest payment

Specify different strategies of hostile takeovers defense, including poison pill, greenmail, golden parachutes, and white knight.

White Knight- strategy involves the target firm finding a more suitable acquirer (the "white knight") and prompting it to compete with the initial hostile acquirer to take over the firm. In other words, the white knight makes a competing friendly offer to acquire the target company. Hostile takeover defense- Poison Pill- typically involve the creation of securities that give their holders certain rights that become effective when a takeover is attempted. The "pill" allows the shareholders to receive special voting rights or securities that make the firm less desirable to the hostile acquirer. Greenmail- is a strategy by which the firm repurchases, through private negotiation, a large block of stock at a premium from one or more shareholders to end a hostile takeover attempt by those shareholders. Golden Parachute- provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over.

Operating Lease:

often 5 years or less, canceable at option of the lessee (cancelation fee), assets leased have a longer usable life than the term of lease. Ex, Computer Systems. Common for short-lived assets like automobiles. May have option to buy asset at end of lease. Total of payments made by lessee are less than the lessor's initial cost of investment