Deck 14: Risk Management, Bankruptcy and Financial Distress

Question 1

MakeStuff Company
The MakeStuff Company's earnings stream is highly dependent on the cost of a key commodity input. Management believes taxable earnings will be $100,000 if the input price is low, taxable earnings will be $50,000 if the input price is at a moderate level, but earnings will be zero if the input price is high. Management sees these outcomes as being equally likely. The company pays a 15% tax rate on the first $50,000 of taxable earnings, and a 25% rate on all earnings above $50,000.

-What is MakeStuff's expected after tax earnings if it remains unhedged?

A) $50,000
B) $42,500
C) $80,000
D) $40,833

Answer 1

$40,833

Question 2

MakeStuff Company
The MakeStuff Company's earnings stream is highly dependent on the cost of a key commodity input. Management believes taxable earnings will be $100,000 if the input price is low, taxable earnings will be $50,000 if the input price is at a moderate level, but earnings will be zero if the input price is high. Management sees these outcomes as being equally likely. The company pays a 15% tax rate on the first $50,000 of taxable earnings, and a 25% rate on all earnings above $50,000.

-What is MakeStuff's after-tax earnings if it can lock in the moderate price level for sure?

A) $50,000
B) $42,500
C) $80,000
D) $40,333

Answer 2

$42,500

Question 3

Suppose the spot price of oil is $49.50 per barrel, while the October futures price is $51.00 per barrel. For this contract, the basis is

A) $51.00
B) $49.50
C) $1.50
D) $100.50

Answer 3

$1.50

Question 4

Exhibit 17-1
S&P 500 Index; $250 × index May 2004


-Refer to Exhibit 17-1. For the purpose of marking to market what is the current value of the December contract?

A) $262,850.00
B) $264,837.50
C) $265,550.00
D) $238,250.00

Question 5

You sell 20 corn futures contracts when the futures price is $3.67 per bushel (each contract is for 5,000 bushels). If you eventually settle the contract at $3.78, what is your payoff?

A) $11,000
B) -$11,000
C) $13,000
D) -$13,000

Question 6

Exhibit 17-2
Coffee; 37,500 lbs per contract, $ per lb. May 2004


-Refer to Exhibit 17-2. If you are interested in purchasing a December futures contract, what is the price of a 37,500 lbs contract for December delivery?

A) $43,500
B) $37,500
C) $32,500
D) $47,500

Question 7

If the company has $3,000,000 in funds to distribute to unsecured creditors, what is the settlement that is received by the holders of the notes payable in Case I?

A) $1,764,706
B) $2,500,000
C) $735,250
D) $1,326,690

Question 8

If the company has $3,000,000 in funds to distribute to unsecured creditors, what is the settlement that is received by the holders of the subordinated debentures in Case II?

A) $2,250,000
B) $1,203,525
C) $$1,046512
D) $1,538,957

Question 9

If the company has $3,000,000 in funds to distribute to unsecured creditors, what is the settlement that is received by the holders of the subordinated debentures in Case III?

A) $1,250,000
B) $958,250
C) $745,400
D) $1,075,268

Question 10

If the company has $3,000,000 in funds to distribute to unsecured creditors, what is the settlement that is received by the holders of the subordinated debentures in Case I?

A) $1,050,534
B) $1,250,000
C) $367,647
D) $882,353

Question 11

If the company has $3,000,000 in funds to distribute to unsecured creditors, what is the settlement that is received by the holders of the accounts payables in Case II?

A) $162,791
B) $187,209
C) $350,000
D) $235,310

Question 12

If the company has $2,456,000 in funds to distribute to unsecured creditors, what is the settlement that is received by the holders of the notes payable in Case I?

A) $1,444,706
B) $2,500,000
C) $1,055,294
D) $1,863,685

Question 13

If the company has $5,245,000 in funds to distribute to unsecured creditors, what is the settlement that is received by the holders of the subordinated debentures in Case II?

A) $420,300
B) $1,829,700
C) $2,250,000
D) $1,256,200