This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ding employees. 10. There are four possible reasons why firms may choose legal bankruptcy over private workout: 1) It may be less expensive (although legal bankruptcy is usually more expensive). 2) Equity investors can use legal bankruptcy to “hold out.” 3) A complicated capital structure makes private workouts more difficult. 4) Conflicts of interest between creditors, equity investors and management can make private workouts impossible. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. Under the absolute priority rule (APR), claims are paid out in full to the extent there are assets. In this case, assets are $28,500, so you should propose the following: Distribution of liquidating value $4,800 8,000 10,000 5,700 0 Trade credit Secured mortgage notes Senior debentures Junior debentures Equity 2. Original claim $4,800 8,000 10,000 15,000 0 There are many possible reorganization plans, so we will make an assumption that the mortgage bonds are fully recognized as senior debentures, the senior debentures will receive junior debentures in the value of 65 cents on the dollar, and the junior debentures will receive any remaining value as equity. With these assumptions, the reorganization plan will look like this: Original claim $19,000 9,500 7,500 Reorganized claim Senior debenture $19,000 Junior debenture 6,175 Equity 1,825 Mortgage bonds Senior debentures Junior debentures 3. Since we are given shares outstanding and a share price, the company must be publicly traded. First, we need to calculate the market value of equity, which is: Market value of equity = 5,000($18) = $90,000 We also need the book value of debt. Since we have the value of total assets and the book value of equity, the book value of debt must be the difference between these two figures, or: Book value of debt = Total assets – Book value of equity Book value of debt = $42,000 – 19,000 Book value of debt = $23,000 555 Now, we can calculate the Z-score for a publicly traded company, which is: Z-score = 3.3(EBIT/Total assets) + 1.2(NWC/Total assets) + 1.0(Sales/Total assets) + .6(Market value of equity/Book value of equity) + 1.4(Accumulated retained earnings/Total assets) Z-score = 3.3($6,500/$42,000) + 1.2($3,100/$42,000) + ($61,000/$42,000) + .6($90,000/$19,000) +1.4($13,500/$42,000) Z-score = 5.344 4. Since this company is private, we must use the Z-score for private companies and nonmanufacturers, which is: Z-score = 6.56(NWC/Total assets) + 3.26(Accumulated retained earnings/Total assets) + 1.05(EBIT/Total assets) + 6.72(Book value of equity/Total liabilities) Z-score = 6.56($6,800/$75,000) + 3.26($19,000/$75,000) + 1.05($8,300/$75,000) + 6.72($26,000/$49,000) Z-score = 5.103 556 CHAPTER 31 INTERNATIONAL CORPORATE FINANCE
Answers to Concepts Review and Critical Thinking Questions 1. a. b. c. 2. 3. The dollar is selling at a premium because it is more expensive in the forward market than in the spot market (SFr 1.53 versus SFr 1.50). The franc is expected to depreciate relative to the dollar because it will take more francs to buy one dollar in the future than it does today. Inflation in Switzerland is higher than in the United States, as are nominal interest rates. The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This is the relative PPP relationship. a. b. c. The Australian dollar is expected to weaken relative to the dollar, because it will take more A$ in the future to buy one dollar than it does today. The inflation rate in Australia is higher. Nominal interest rates in Australia are higher; relative real rates in the two countries are the same. 4. 5. 6. A Yankee bond is most accurately described by d. No. For example, if a country’s currency strengthens, imports become cheaper (good), but its exports become more expensive for others to buy (bad). The reverse is true for currency depreciation. Additional advantages include being closer to the final consumer and, thereby, saving on transportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantages include political risk and costs of supervising distant operations. One key thing to remember is that dividend payments are made in the home currency. More generally, it may be that the owners of the multinational are primarily domestic and are ultimately concerned about their wealth denominated in their home currency because, unlike a multinational, they are not internationally diversified. a. b. False. If prices are rising faster in Great Britain, it will take more pounds to buy the same amount of goods that one dollar can buy; the pound will depreciate relative t...
View Full Document