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Maple Aircraft has issued a 4¾% convertible subordinated debenture due 3 years from now

Maple Aircraft has issued a 4¾% convertible subordinated debenture due 3 years from now

Maple Aircraft has issued a 4¾% convertible subordinated debenture due 3 years from now. The conversion price is $47.00 and the debenture is callable at 102.75% of face value

Product Brand: Academic Research Bureau

Product Currency: USD, EUR, CAN

Product Price: $$

Product In-Stock: InStock

Editor's Rating:
4.5

1)    Week 1

Assignments to complete this week:

  • Reading:
    • Chapter 1: Introduction to Corporate Finance
    • Chapter 2: How to Calculate Present Values
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • Activity 1 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation in the University Policies for Discussion Question and Response expectations.

Discussion Question 1 – CLO 1, CLO 3, CLO 5, CLO 6, CLO 7, & CLO 8

We, Executives of  the F & H company, are reviewing complaints from the investors about the company’s slow growth of profits and dividends.

Unlike those doubters, we have confidence in the long-run demand for mechanical encabulators, despite competing digital products. We are, therefore, determined to invest to maintain our share of the overall encabulator market.

F&H has a rigorous CAPEX approval process, and we are confident of returns around 8% on investment. That’s a far better return than F&H earns on its cash holdings. The CFO went on to explain that F&H invested excess cash in short-term U.S. government securities, which are almost entirely risk-free but offered only a 4% rate of return.

Please answer the following questions in detail, provide examples whenever applicable, support your argument with citing peer-reviewed sources.

  1. Is a forecasted 8% return in the encabulator business necessarily better than a 4% safe return on short-term U.S. government securities? Justify why or why not?
  2. Is F&H’s opportunity cost of capital 4%?
  3. How in principle should the CFO determine the cost of capital?

Activity 1 – CLO  1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7

Several years ago, The Wall Street Journal reported that the winner of the Massachusetts State Lottery prize had the misfortune to be both bankrupt and in prison for fraud. The balance of the prize was $9,420,713, to be paid in 19 equal annual installments (There were 20 installments, but the winner had already received the first payment). The bankruptcy court judge ruled that the prize should be sold off to the highest bidder and the proceeds to be paid to the creditors.

  • If the interest rate was 8%, how much would you have been prepared to bid for the prize?
  • Enhance Reinsurance Company was reported to have offered $4.2 million. Find the return that the company was looking for.

Please explain your answer in detail and provide in-text citations.

2)    Week 2

Assignments to complete this week:

  • Reading:
    • Chapter 5: Net Present Value and Other Investment Criteria
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • Professional Assignment 1 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation in the University Policies for Discussion Question and Response expectations.

Discussion Question 1 – CLO 1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

  1. What is the payback period on each of the above projects?
  2. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?
  3. If you use a cutoff period of three years, which projects would you accept?
  4. If the opportunity cost of capital is 10%, which projects have positive NPVs?
  5. If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” True or false?
  6. If the firm uses the discounted-payback rule, will it accept any negative-NPV projects? Will it turn down any positive NPV projects?

Professional Assignment 1 – CLO 1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Consider the cash flows of the following three A, B, C projects.

  1. If the opportunity cost of capital is 11%, and you have unlimited access to the capital, which one(s) would you accept? What would be your action if the cost of capital is 16%?
  2. Suppose that you have limited access to the capital and you need to choose only one project. Which one would you choose? The discount rate is still 11%.
  3. What is the payback period of each project? Please analyse if in general a decision based on payback is consistent with a decision based on NPV.
  4. What are the internal rates of return (IRR) on the three projects? Does the IRR rule in this case give the same decision as NPV?
  5. If the opportunity cost of capital is 11%, what is the profitability index for each project? Please analyse if in general decisions based on profitability index is consistent with decisions based on NPV.
  6. What is the most generally accepted measure to choose between the projects? Please justify your answer.

Please explain your answer in detail and provide in-text citations.

*Please refer to the Grading Criteria for Professional Assignments in the University Policies for specific guidelines and expectations.

3)    Week 3

Assignments to complete this week:

  • Reading:
    • Chapter 10: Project Analysis
    • Chapter 11: How to Ensure That Projects Truly Have Positive NPVs
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • Activity 2 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation in the University Policies for Discussion Question and Response expectations.

Discussion Question 1 – CLO 1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

  1. Please describe the real option inherent in each of the following cases and provide some real-life hypothetical cases. Also, explain in each case if the option seller is involved and who that seller might be.
  2. Moda di Milano postpones a major investment. The expansion has positive NPV on a discounted cash-flow basis, but top management wants to get a better fix on product demand before proceeding.
  3. Western Telecom commits to production of digital switching equipment specially designed for the European market. The project has a negative NPV, but it is justified on strategic grounds by the need for a strong market position in the rapidly growing, and potentially very profitable, market.
  4. Western Telecom vetoes a fully integrated, automated production line for the new digital switches. It relies on standard, less-expensive equipment. The automated production line is more efficient overall, according to a discounted cash-flow calculation.
  5. Mount Fuji Airways buys a jumbo jet with special equipment that allows the plane to be switched quickly from freight to passenger use or vice versa.
  6. State if each of the following statements is true or false. Justify your answer.
  7. Decision trees can help identify and describe real options.
  8. The option to expand increases PV.
  9. High abandonment value decreases PV.
  10. If a project has a positive NPV, the firm should always invest immediately.
  11. State if each of the following statements are true or false. Justify your answer.
  12. A firm that earns the opportunity cost of capital is earning economic rents.
  13. A firm that invests in positive NPV ventures expects to earn economic rents.
  14. Financial managers should try to identify areas where their firms can earn economic rents, because they think that positive NPV projects are likely to be found in projects that earn economic rent.
  15. Economic rent is the equivalent annual cost of operating capital equipment.

Activity 2 – Equilibrium price  – CLO 1, CLO 3, CLO 4, CLO 6, CLO 8

The company “World Airline System” is composed of the routes X and Y, and each route requires 10 aircrafts. These routes can be serviced by three types of aircrafts — A, B, and C. There are (five) 5 type A aircraft available, 10 type B, and 10 type C. These aircrafts are identical except for their operating costs, which are as follows:

Annual operating cost ($ millions)

Aircraft type Route X Route Y
A 1.5 1.5
B 2.5 2.0
C 4.5 3.5

The aircrafts have a useful life of five years and a salvage value of $1 million.

The aircrafts owners do not operate the aircrafts themselves but rent them to the operators. Owners act competitively to maximize their rental income, and operators attempt to minimize their operating costs. Airfares are also competitively determined. Assume the cost of capital is 10%.

  1. Which aircraft would be used on which route, and how much would each aircraft be worth?
  2. What would happen to usage and prices of each aircraft if the number of type A aircrafts increased to 10. 15, or 20?
  3. State any additional assumptions you need to make.

Please explain your answer in detail and provide in-text citations.

4)    Week 4

Assignments to complete this week:

  • Reading:
    • Chapter 13: Efficient markets and Behavioral Finance
    • Chapter 14: An Overview of Corporate Financing
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • CLA 1 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation in the University Policies for Discussion Question and Response expectations.

Discussion Question 1 – CLO 1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

  1. State if each of the following statements is true or false. Justify your answers.

The efficient-market hypothesis assumes that

  1. There are no taxes.
  2. There is perfect foresight.
  3. Successive price changes are independent.
  4. Investors are irrational.
  5. There are no transaction costs.
  6. Forecasts are unbiased.
  7. Evaluate each of the following statements:
  8. “The random-walk theory, with its implication that investing in stocks is like playing roulette, is a powerful indictment of our capital markets.”
  9. “If everyone believes you can make money by charting stock prices, then price changes won’t be random.”
  10. “The random-walk theory implies that events are random, but many events are not random. If it rains today, there’s a fair bet that it will rain again tomorrow.”
  11. Does the statement, “mutual fund X has had superior performance for each of the last 10 years” contradict the efficient market hypothesis?
  12. If fund X is the only fund, calculate the probability that only by chance it would have achieved superior performance for each of the past 10 years.
  13. Now recognize that there are nearly 10,000 mutual funds in the United States. What is the probability that by chance there is at least 1 out of 10,000 funds that obtained 10 successive years of superior performance?
  14. Financial markets and intermediaries channel savings from investors to corporate investment. The savings make this journey by many different routes. Give a specific example for each of the following routes:
  15. Investor to financial intermediary, to financial markets, and to the corporation.
  16. Investor to financial markets, to a financial intermediary, and to the corporation.
  17. Investor to financial markets, to a financial intermediary, back to financial markets, and to the corporation.

CLA 1 Comprehensive Learning Assessment – CLO  1, CLO 2, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives and the value of existing firms. Evaluate the change in taxation on the valuation of the following project:

Assumptions: Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in year 3 and 50 if the asset is scrapped in year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%.

  1. Please verify that the information given above yields NPV = 0.
  2. If you decide to terminate the project in year two (2) what would be the NPV of the project?
  3. Suppose that the government now changes tax depreciation to allow a 100% write-off in year one (1). How does this affect your answers to parts a and b above?
  4. Would it now make sense to terminate the project after two rather than three years?
  5. How would your answers change if the corporate income tax were abolished entirely?

Please explain your answer in detail and provide in-text citations.

*Please refer to the Grading Criteria for Comprehensive Learning Assessments (CLAs) in the University Policies for specific guidelines and expectations.

5)    Week 5

Assignments to complete this week:

  • Reading:
    • Chapter 20: Understanding Options
    • Chapter 21: Valuing Options
    • Chapter 22: Real Options
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • Activity 3 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation in the University Policies for Discussion Question and Response expectations.

Discussion Question 1 – CLO 1, CLO 6, CLO 7

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

  1. Discuss the risks and payoffs of the following positions, accompanied by payoff graphs.
  • Buy stock and a put option on the stock.
  • Buy a stock.
  • Buy a call.
  • Buy stock and sell a call option on the stock (covered call).
  • Buy a bond.
  • Buy stock, buy a put, and sell a call.
  • Sell a put (naked put).

2. What is put–call parity and why does it hold? Could you apply the parity formula to a call and put options with different exercise prices?

3. Over the coming year, Ragwort’s stock price might drop from $100 to $50 or it might rise to $200. The one-year interest rate is 10%.

  1. What is the delta of a one-year call option on Ragwort stock with an exercise price of $100?
  2. Use the replicating-portfolio method to value this call.
  3. In a risk-neutral world, what is the probability that Ragwort stock will rise in price?
  4. Use the risk-neutral method to check your valuation of the Ragwort option.
  5. If someone told you that in reality there is a 60% chance that Ragwort’s stock price will rise to $200, would you change your view about the value of the option? Explain.

Activity 3 – CLO 1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

You have an option to purchase all of the assets of the Overland Railroad for $2.5 billion. The option expires in nine months. You estimate Overland’s current (month 0) present value (PV) as $2.7 billion. Overland generates after-tax free cash flow (FCF) of $50 million at the end of each quarter (i.e., at the end of each three-month period). If you exercise your option at the start of the quarter, that quarter’s cash flow is paid out to you. If you do not exercise, the cash flow goes to Overland’s current owners.

In each quarter, Overland’s PV either increases by 10% or decreases by 9.09%. This PV includes the quarterly FCF of $50 million. After the $50 million is paid out, PV drops by $50 million. Thus, the binomial tree for the first quarter is (figures in millions):

The risk-free interest rate is 2% per quarter.

  1. Build a binomial tree for Overland, with one up or down change for each three-month period (three steps to cover your nine-month option).
  2. Suppose you can only exercise your option now, or after nine months (not at month 3 or 6). Would you exercise now?
  3. Suppose you can exercise now, or at month 3, 6, or 9. What is your option worth today? Should you exercise today, or wait?

Please explain your answer in detail and provide in-text citations.

6)    Week 6

Assignments to complete this week:

  • Reading:
    • Chapter 23: Credit Risk and the Value of Corporate Debt
    • Chapter 24: The Many Different kinds of Debt
    • Chapter 25: Leasing
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • Professional Assignment 2 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation on pages 9-10 of the University Policies for Discussion Question and Response expectations. 

Discussion Question 1 – CLO 1, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

  1. A friend has mentioned that she has read somewhere that the following variables can be used to predict bankruptcy: (a) the company debt ratio; (b) the interest coverage; (c) the amount of cash relative to sales or assets; (d) the return on assets; (e) the market-to-book ratio; (f) the recent return on the stock; (g) the volatility of the stock returns. The problem is that she can’t remember whether a high value of each variable implies a high or a low probability of bankruptcy. Can you help her out?
  2. Magna Charter has been asked to operate a Beaver bush plane for a mining company exploring north and west of Fort Liard. Magna will have a firm one-year contract with the mining company and expects that the contract will be renewed for the five-year duration of the exploration program. If the mining company renews at year 1, it will commit to use the plane for four more years. Magna Charter has the following choices:
    1. Buy the plane for $500,000.
    2. Take a one-year operating lease for the plane. The lease rate is $118,000, paid in advance.
    3. Arrange a five-year, noncancelable financial lease at a rate of $75,000 per year, paid in advance.

These are net leases; all operating costs are absorbed by Magna Charter. How would you advise Agnes Magna, the charter company’s CEO? For simplicity assume five-year, straight-line depreciation for tax purposes. The company’s tax rate is 30%.

The weighted-average cost of capital for the bush-plane business is 14%, but Magna can borrow at 9%. The expected inflation rate is 4%. Ms. Magna thinks the plane will be worth $300,000 after five years. But if the contract with the mining company is not renewed (there is a 20% probability of this outcome at year 1), the plane will have to be sold on short notice for $400,000.

If Magna Charter takes the five-year financial lease and the mining company cancels at year 1, Magna can sublet the plane, that is, rent it out to another user. Make additional assumptions as necessary.

Professional Assignment 2 – CLO 1, CLO 3, CLO 5, CLO 6, CLO 7 

Maple Aircraft has issued a 4¾% convertible subordinated debenture due 3 years from now. 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.

  1. In the absence of the conversion feature, what is the current yield and yield to maturity?
  2. What is the conversion ratio of the debenture?
  3. If the conversion ratio were 50, what would be the conversion price?
  4. What is the conversion value?
  5. At what stock price is the conversion value equal to the bond value?
  6. Can the market price be less than the conversion value?
  7. How much is the convertible holder paying for the option to buy one share of common stock?
  8. By how much does the common have to rise after 3 years to justify conversion?

Please explain your answer in detail and provide in-text citations.

*Please refer to the Grading Criteria for Professional Assignments in the University Policies for specific guidelines and expectations.

7)    Week 7

Assignments to complete this week:

  • Reading:
    • Chapter 26: Managing Risk
    • Chapter 27: Managing International Risk
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • Activity 4 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation in the University Policies for Discussion Question and Response expectations.

Discussion Question 1 – CLO 1, CLO 2, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

  1. Explain how companies can hedge risks in their operating costs by using each of the following instruments. Hypothetical examples are required.
    1. Futures and forward contracts
    2. Option contracts
    3. Swap contracts
    4. Buying one asset and selling another. What is the hedge ratio and how is it determined?
  2. The websites of the major commodities exchanges provide futures prices. Calculate the annualized net convenience yield for a commodity of your choice. Retrieve the current risk free rate from the U.S. Government treasury site. (Note: You may need to use the futures price of a contract that is about to mature as your estimate of the current spot price.)
  3. You can find spot and futures prices for a variety of equity indexes on www.wsj.com. Pick one and check whether it is fairly priced. You will need to do some research work to find the dividend yield on the index and the interest rate.
  4. Define each of the following theories accompanied by equations. Hypothetical examples are required.
    1. Interest rate parity.
    2. Expectations theory of forward rates.
    3. Purchasing power parity.
    4. International capital market equilibrium (relationship of real and nominal interest rates in different countries).

Activity 4 – CLO 1, CLO 3, CLO 5, CLO 6, CLO 7, CLO 8

Your investment bank has an investment of $100 million in the stock of the Swiss Roll Corporation and a short position in the stock of the Frankfurter Sausage Company. Here is the recent price history of the two stocks:

Percentage price change

Month Frankfurter Sausage Swiss Roll
January -10% -10%
February -10% -5%
March -10% 0%
April 10% 0%
May 10% 5%
June 10% 10%

On the evidence of these six months, how large would your short position in Frankfurter Sausage need to be to hedge as far as possible against movements in the price of Swiss Roll?

Please explain your answer in detail and provide in-text citations.

8)    Week 8

Assignments to complete this week:

  • Reading:
    • Review all chapters covered that will assist in the completion of the CLA 2 assignment
  • Post DQ Answers by Thursday at 11:59 p.m.
  • Post DQ Peer Responses by Sunday at 11:59 p.m.
  • CLA 2 Presentation due in class
  • CLA 2 due by Sunday at 11:59 p.m.

Each week, students must post one (1) answer and one (1) peer response for every discussion question. Please see Grading Criteria for Discussion Board Participation in the University Policies for Discussion Question and Response expectations.

Discussion Question 1 – Summary & Critical Thinking – Week/Course Learning Outcomes 

Welcome to the last week of your course. In this discussion question you have the opportunity to be creative and to relate what you have learned to your professional lives. Please explore and critically think about some of the learning outcomes and concepts presented in this course. Please effectively communicate how you would lead an organization (or a group of people within the organization) by applying the knowledge you have learned ethically and responsibly.  Your discussion should also include innovative thinking, and information-technology aspects (such as the Internet, social-media, computers, and so forth) that may assist you in decision-making. You may frame your discussion around any functional component of business, and in any context; problem-solving, management, leadership, organizational behavior, and so forth.

CLA 2 Comprehensive Learning Assessment 2 – CLO 1, CLO 2, CLO 3, CLO 4, CLO 5, CLO 6, CLO 7, CLO 8

Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecasted cash flows from the proposed plants are as follows:

The spot exchange rate for euros is $1.3/€, while the rate for Swiss francs is CHF 1.5/$. The interest rate is 5% in the United States, 4% in Switzerland, and 6% in the euro countries. The financial manager has suggested that, if the cash flows were stated in dollars, a return in excess of 10% would be acceptable.

Should the company go ahead with either project? If it must choose between them, which should it take?

Please explain your answer in detail and provide in-text citations.

*Please refer to the Grading Criteria for Comprehensive Learning Assessments (CLAs) in the University Policies for specific guidelines and expectations.

CLA 2 Comprehensive Learning Assessment (CLA 2) Presentation

In addition to your CLA 2 report, please prepare a professional PowerPoint presentation summarizing your findings for CLA 2. The presentation will consist of your major findings, analysis, and recommendations in a concise presentation of 18 slides (minimum). You should use content from your CLA 2 report as material for your PowerPoint presentation. In addition, you should include learning outcomes from all your major assignments. This would include PA 1, CLA 1, PA 2, and of course, CLA 2 (unless otherwise specified by your Professor). An agenda, executive summary, and references slides should also be included. Please keep in mind that the university is moving towards a more digital footprint for our students. This means that your final CLA 2 presentation may be recorded, so that you may include it in your “e-portfolio” (graduating students should have all of their CLA 2 presentations on a flash-drive, in addition to student biography, resume, interests, and so forth). Students will present their PowerPoint during the last week of class in either the On-Campus Class Session or the online Virtual Class Session, as determined by the professor. Presentations should not exceed 18 minutes.

*Please refer to the Grading Criteria for CLA 2 Presentations in the University Policies for specific guidelines and expectations.

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Maple Aircraft has issued a 4¾% convertible subordinated debenture due 3 years from now

Maple Aircraft has issued a 4¾% convertible subordinated debenture due 3 years from now. The conversion price is $47.00 and the debenture is callable at 102.75% of face value

Product Brand: Academic Research Bureau

Product Currency: USD, EUR, CAN

Product Price: $$

Product In-Stock: InStock

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4.5

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