A growing concern of employers is time spent in activities like surfing the Internet and e-mailing friends during work hours. The San Luis Obispo Tribune summarized the fundings from a survey of a large sample of workers in an article that ran under the headline "Who Goofs Off 2 Hours a Day? Most Workers, Survey Says" (August 3, 2006). Suppose that the CEO of a large company wants to determine whether the average amount of wasted time during an 8-hour work day for employees of her company is less than the reported 120 minutes. Each person in a random sample of 12 employees was contacted and asked about daily wasted time at work. The resulting data are the following:

108 112 117 128 130 111 131 116 113 113 105 128

Is the following statement "These data provide evidence that the mean wasted time for this company is less than 120 minutes with significance level alpha equals 0.05" true or false?

First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0511. The standard deviation of the returns on the market portfolio is 22 percent and the expected market risk premium is 6.4 percent. The company has bonds outstanding with a total market value of $56.9 million and a yield to maturity of 6.7 percent. The company also has 6.1 million shares of common stock outstanding, each selling for $32. The company’s CEO considers the firm’s current debt-equity ratio optimal. The corporate tax rate is 24 percent and Treasury bills currently yield 4.5 percent. The company is considering the purchase of additional equipment that would cost $58.5 million. The expected unlevered cash flows from the equipment are $19.25 million per year for 5 years. Purchasing the equipment will not change the risk level of the firm. Calculate the NPV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

Options in corporate finance

A. The CEO of a growing cyber-security firm was awarded 25,000 stock options as part of her pay package.  She can exercise the options -turn them into stock- in two years.  The company’s stock price was $35.00 per share at the time of the stock option grant.  Shortly after the option award was received, she went to an investment banking firm and bought put options at a strike price of $35.00.  The option expires in two years.

(i) What does the put option do for the CEO?  Carefully explain why your stated result occurs.

(ii) Stock options and stock ownership are included in compensation packages to create incentives for CEOs to create value for shareholders.  Does this put option purchase change those incentives? If so, how?  

(iii) If you were a shareholder in this company, would you want to be informed about these types of transactions by the CEO?

____________________________________________________________

B.  Company B is a small, publicly-traded technology company.  Company B is close to completing development of a new software/hardware product for schools that uses voice recognition to quickly translate a lecture into written notes that are projected onto a screen and automatically sent to students as PDF documents.  The lecturer can then annotate the notes with a drawing pad linked to the computer projection system.  These annotations are included in the PDF that is distributed after the lecture is complete.  

      The company needs about $30 million to complete development and begin production and marketing of this product.  The company is profitable with one other product that generates about $1,200,000 in cash flow annually.  For many reasons the company has been very secretive about its new product so its stock price is quite low, being based on the modest cash flows of its existing product.  Company officials and outside consultants agree that it is too early to reveal the new product’s details given what they know of competing products.

      The company has hired an investment banker to help it determine how to raise the $30 million.  The banker immediately recommends convertible bonds.  Current interest rates on bonds or notes for companies of this type are in the range of 8% to 10%, but convertible debt would probably have a coupon rate of 3% to 5% depending on the conversion price.  The higher the conversion price the higher the coupon rate.  

The banker says that convertible bonds are a win-win for the company in this situation.  The company can keep their product secret but issue stock at a higher price (the conversion price) than the current stock price.  In the meantime, the interest rate on the debt will be about 4% or 5%, which the company should be able to support from its cash flow.  The banker explains that if for some reason the product is not a success, and there is no conversion to stock, the company has issued debt at a very low rate. Probably 5% below the rate on non-convertible debt.  Win-win!

The company’s tax rate is about 28%.

1. Can the company afford the interest on $30 million of convertible debt?
2. Is the banker correct about this being a win-win situation for the company?  Is there a different perspective that company managers need to understand before making this decision?  Explain.
3. If convertible debt has a lower coupon rate because the conversion option has value.  Why don’t all companies issue convertible debt and save on interest costs?

You are a US company which makes fashion accessories, particularly fashion sunglasses. Recently you decided to expand the company internationally and you are going to start first in the European Union (EU) which is one of the worlds largest markets. You will both produce some products there and also sell some products there. Your forecast for next year is below. In the forecast, any item marked as an EU item is actually the US dollar equivalent of Euro which has been translated at the EUR forward rate.

Question: What answer best represents the foreign exchange exposure in your forecast?

Spot EUR fx rate: 1.20 Forward EUR fx rate: 1.22 (all numbers expressed as $USD '000)

Cash Revenues

US revenues $5,000

EU revenues $2,000

Cash Costs

Corporate costs ($1,000)

Research & development ($500)

US capital investments ($100)

EU capital investments ($2,000)

US salaries ($2,000)

EU salaries ($1,000)

Possible answers:

$1,000

($1,000)

(820 Euro)

(1,000 Euro)

Please show step by step answers and reasonings

Thank you

Timmins Company of Emporia, Kansas, spreads herbicides and applies liquid fertilizer for local farmers. On May 31, 2020, the company’s Cash account per its general ledger showed a balance of $6,100.50.
The bank statement from Emporia State Bank on that date showed the following balance.

A comparison of the details on the bank statement with the details in the Cash account revealed the following facts.