Fleming, a publicly held company, and several officers of the company, were sued by various stockholders for securities fraud for filing documents that were materially misleading. The stockholders contended that information failed to discuss litigation lost by Fleming that resulted in a damage award of $200 million, which led to the company's stock falling by about 25%. The stock pricer recovered some after part of the trial verdict was set aside, and Fleming settled the case by paying $20 million. Stockholders contended that failure to fully reveal the risks of that litigation caused losses to investors in Fleming stock. The district court dismissed the suit because the plaintiffs failed to show that Fleming made deliberate and materially misleading statements of omissions. Stockholders appealed. [City of Philadelphia v. Fleming Co., 264 F.3d 1245, 10th Cir. (2001)]

What evidence is required in order to show that the defendant "deliberately" made misleading statements or omissions to potential stockholders.

Explain the rationale behind the idea that equity is a call option on a firm's assets. In other words, explain why equity ownership of a firm is equivalent to owning a call option on the firm’s assets. Next, explain what it would mean for shareholders to allow this call option to expire, and under what circumstances shareholders would do so.

Defensive tactics such as poison pills and supermajority clauses are designed to resist unfriendly takeovers. Briefly describe how share rights plans work and why they might discourage takeover attempts. Do such tactics work to the advantage of all shareholders all of the time? Discuss.

Suppose that a manufacturer has an ongoing need for silver as a raw material in the production process, and is concerned about the risk of the price of silver going up. The firm is considering two hedging choices: futures contracts and option contracts.

(i) Suppose that the firm decides to hedge using futures contracts. Should it buy or sell futures contracts? Explain.

(ii) Suppose that the firm decides to hedge using option contracts. Should it use call or put options? Should it buy or sell these options? Explain.

Lastly, briefly discuss the advantages and disadvantages of hedging using options as compared to futures contracts.

I asked them to conduct a cash flow analysis to make sure that the proposed t-shirt venture generate value. The students, after careful data collection and analysis, have come up with the following assumptions for T-shirt Corp.:

Assumptions:

1. The life of the project is expected to be 5 years.  Please assume that the analysis is taking place at the end of 2018. 2019 will be the first year of operation.
2. The projected sales are:

3. The price of a t-shirt will be $25 in 2019 and will increase by 3% per year in the following years.
4. The cost of procuring one t-shirt will be $4 in 2019 and will increase by 2% per year afterwards.
5. The cost of printing a design will be $2 per t-shirt.
6. There will be marketing expenses amounting to $1,000 per year.
7. T-shirt Corp. needs to invest in a machine that would print designs on the t-shirts.  The machine costs $3,000 and will be depreciated fully using a straight line method over 5 years. At the end of 2021, the machine will be recycled at no cost.
8. The company will run the operations in a garage owned by one of the parents.  The rent and utilities allocated to the garage is $200 per month.  This amount would be paid regardless of how the garage is utilized.
9. The company will finance the machine with a bank loan.  Interest expenses will be $300 per year.
10. In order to run the t-shirt venture, the T-shirt Corp. will need to invest 10% of the following year’s sales in inventory.  The venture will also need to have 15% of following year’s sales in accounts payable and 20% of following year’s sales in accounts receivable.
11. T-shirt Corp. already spent $5,000 for market research in 2018.
12. Tax rate (federal plus state) is 30%.
13. The cost of capital for this project is estimated to be 10%.

Please analyze this project and provide advice to T-shirt Corp.  Should they start the t-shirt venture?

a) Briefly explain the concept of market efficiency.

b) The textbook describes the field of Behavioral Finance as the study of “how reasoning errors influence financial decisions.” The textbook also contains a good discussion of how cognitive errors, biases and heuristics lead to irrational decisions by investors. What implications does all this have for stock market efficiency? Discuss.

What are the ultimate principles in the principal-agent framework?

You are trying to evaluate the effects of issuing 300 million of new debt and using the proceeds either to pay a dividend or to repurchase shares for Star Inc. Star Inc. currently has 232.44 million shares outstanding and is trading at $56.37 per share. Its current book value of equity is 127.6 million and EBIT is 527 million. Tax rate is 40%. Cost of debt for the new debt is 13%.

a.) Star's book value and market value of equity after debt issuance.

b.) What will be the number of shares outstanding and the new share prices? please show for both the dividend and repurchase scenario.

c.) What will happen to the earnings per share. Please show for both the dividend and repurchase scenario.

What are the advantages and disadvantages of futures compared to forwards?

Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $80, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $125 million, a coupon rate of 5 percent, and sells for 91 percent of par. The second issue has a face value of $110 million, a coupon rate of 4 percent, and sells for 106 percent of par. The first issue matures in 23 years, the second in 9 years.

Suppose the most recent dividend was $4.80 and the dividend growth rate is 5.1 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the company’s only activity and that the company will close one year from today. The company is obligated to make a $4,600 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 4,600 $ 4,000 Good .50 5,350 5,950 a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the company’s equity if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) c. Which project would the company’s stockholders prefer if they are risk neutral? d. Suppose bondholders are fully aware that stockholders might choose to maximize equity value rather than total company value and opt for the high-volatility project. To minimize this agency cost, the company's bondholders decide to use a bond covenant to stipulate that the bondholders can demand a higher payment if the company chooses to take on the high-volatility project. What payment to bondholders would make stockholders indifferent between the two projects? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

You work for Australia Wide Taxations Solutions—a company of 1,500 employees offering taxation services in different cities across the country. The company offers five services: personal taxation, small business taxation, corporate services, personal wealth creation and corporate asset management.

It is working in a highly regulated and legislated industry.

You have been asked to work with the team conducting a risk assessment for the entire organisation.

How will you identify the risk management scope—what things do you need to look at? What challenges does a scope of this size pose and how would you approach the risk assessment process? (350–400 words)

Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following​ weights: 35​% ​long-term debt, 15​% preferred​ stock, and 50​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 26​%. Debt The firm can sell for ​$1015 a 17​-year, ​$1000​-par-value bond paying annual interest at a 11.00​% coupon rate. A flotation cost of 2.5​% of the par value is required. Preferred stock  7.00​% ​(annual dividend) preferred stock having a par value of ​$100 can be sold for ​$94. An additional fee of ​$5 per share must be paid to the underwriters.

Common stock  The​ firm's common stock is currently selling for ​$70 per share. The stock has paid a dividend that has gradually increased for many​ years, rising from ​$2.75 ten years ago to the ​$5.16 dividend​ payment, Upper D 0​, that the company just recently made. If the company wants to issue new new common​ stock, it will sell them ​$2.50 below the current market price to attract​ investors, and the company will pay ​$2.50 per share in flotation costs. 

  a.  Calculate the​ after-tax cost of debt.

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock​ (both retained earnings and new common​ stock).

d.  Calculate the WACC for Dillon Labs.

acme Services’ CFO is considering whether to take on a new project that has average risk. She has collected the following information: • The company has outstanding bonds that mature in 15 years. The bonds have a face value of $1,000, an annual coupon of 7.5%, and sell in the market today for $1150. There are 15,000 bonds outstanding.
• The risk-free rate is 3%
. • The market risk premium is 5%
. • The stock’s beta is 0.9
. • The company’s tax rate is 35%.
• The company has 100,000 shares of preferred stock with a par value of $100. These shares are currently trading at $73, and pay an annual dividend of $3.50.
• The company also has 2,250,000 common shares trading at $15. These shares last paid an annual dividend of $0.33.
What is Acme's...
a. weight of common shares
b. before tax cost of acmes debt
c. preferred shares
d. value of debt
e. weight of debt
f. firm value