Case Study Facts
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Case Study Facts
The spin-out that occurred in 2008 intensified its perilous capital situation.
The spin-out in 2008 and low-interest rates intensified its perilous capital situation.
Despite its 3 million futures, a national value exceeding $100 billion, and over 25% trading
volume from customers, the company faced a huge debt (Till & Heckinger, 2017).
Corzine’s investment strategy began demanding significant and risky investments in the firm’s
resources, leading to diminishing sources.
Corzine engaged in “repos to maturity” transactions in Europe and made short-term purchases of
European debt.
Jon Corzine joined MF Global during a challenging financial period where the company
experienced increased weakness in its financial status and internal control systems. Corzine
implemented increasingly risky strategies with an enormous investment of the company’s money.
The CEO intended to transform MF Global from a futures commission merchant to an
investment bank. Despite the company’s value exceeding $100 billion, three million options
positions and futures, and a large customer base that contributed to 25% of its trading volume,
the company faced stresses due to its massive debts. Also, MF Global Inc.’s spin-out from its
parent company in 2008 worsened its financial and capital situation. The company relied heavily
on proprietary funds.
Case Study Facts Cont.
MF Global Inc.’s reliance on proprietary funds increased the risk on customers’ funds
(Commodities Futures Trading Commission, 2013).
In 2011, Corzine failed to enhance the company’s deficient systems and increased reliance on
customers’ FCM accounts and cash, leading to unlawful use of customers’ monies.
MF Global Inc.’s sovereign debt portfolio increased by $2 billion by mid-2010.
The company’s board of directors and risk officer disagreed with Corzine’s strategy with an
alarm of bankruptcy.
Corzine underestimated the risk level caused by his strategy. Subsequently, the company
relied on proprietary funds. While the CEO thought the plan on “repo to maturity” would
increase the company’s global growth and lower its debts, the company’s risk officer and
directors perceived the approach as risky. The company recorded an increase in MF Global Inc.’s
sovereign debt by $2 billion, creating loopholes suggesting eventual bankruptcy.
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Related Questions
Gator Fabrics Inc. currently has zero debt (i.e., wd = 0). It is a zero growth company, and additional firm data are shown below. Now the company is considering using some debt, moving to the new capital structure indicated below. The money raised would be used to repurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, by how much would the WACC change, i.e., what is WACCOld − WACCNew?
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Company X has $10M of excess cash (i.e., cash that is not used in the company's operations) and operating assets that will generate risky (i.e., uncertain) future cash flows with a present value today of $25M. It has no other assets. The company has risky zero-coupon bonds outstanding with a face value of $20M, and no other debt.
Who is likely to gain and who is likely to lose from the following maneuvers?
a) Company X pays a cash dividend of $10M to its shareholders.
b) Company X halts operations and sells all of its operating assets for $15M. It invests the proceeds from this sale along with its $10M of existing cash in Treasury Bills (i.e., risk free bonds).
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Although its own operations have shown no growth over the past decade, Hammerworks Inc. has built up a significant cash balance ($2.9 billion) in anticipation of a collapse in equity prices which it believes will create opportunities for valuable acquisitions. Following just such a correction, two potential targets are now being considered: Metallion has a current market capitalization of $1.1 billion, $550 million in 6% debt (YTM also 6%), and generates EBIT of $175 million annually with no growth (a 7.1% profit margin on annual sales of $1.4 billion). Goblikon has an enterprise value of $1.3 billion, a market valued D/E of 1.1, and has been growing its profits at 4% for the past several years (it currently has a P/E ratio of 10). In either case, Hammerworks would be expected to pay off the target’s bond holders in full as there is a change of control clause in their bond indentures. Since either acquisition would be paid for with cash, the firm expects that either acquisition…
arrow_forward
Although its own operations have shown no growth over the past decade, Hammerworks Inc. has built up a significant cash balance ($2.9 billion) in anticipation of a collapse in equity prices which it believes will create opportunities for valuable acquisitions. Following just such a correction, two potential targets are now being considered: Metallion has a current market capitalization of $1.1 billion, $550 million in 6% debt (YTM also 6%), and generates EBIT of $175 million annually with no growth (a 7.1% profit margin on annual sales of $1.4 billion). Goblikon has an enterprise value of $1.3 billion, a market valued D/E of 1.1, and has been growing its profits at 4% for the past several years (it currently has a P/E ratio of 10). In either case, Hammerworks would be expected to pay off the target’s bond holders in full as there is a change of control clause in their bond indentures. Since either acquisition would be paid for with cash, the firm expects that either acquisition…
arrow_forward
Kyma Inc. currently has zero debt. It is a zero growth company, and it has the data shown below. Now the company is
considering using some debt, moving to the new debt/assets ratio indicated below. The money raised would be used to
repurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause
the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, by how much would the
WACC change, i.e., what is WACCold - WACCNew?
New Debt/Assets
35%
Orig. cost of equity, rs
10.0%
New Equity/Assets
65%
New cost of equity = rs
11.0%
Interest rate new = rd 7.0%
Tax rate
40.0%
O1.72%
O2.06%
1.38%
1.04%
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Long-Term Capital Management (LTCM) implemented a convergence trading strategy
involving corporate bonds and U.S. Treasuries. Expecting the spread between corporate
bond yields and Treasury yields to narrow over time, LTCM took large leveraged positions,
going long (buying) corporate bonds and short (selling) Treasuries. However, the 1998
Russian debt crisis triggered a flight to quality, causing corporate bond prices to fall and
Treasury prices to rise, leading to a divergence of the spreads and massive losses for
LTCM's trades.
On July 1, 1998, LTCM initiated a convergence trade by going long $100 million notional of
Baa-rated 10-year corporate bonds with a yield of 7.5% and coupon rate of 7%, and
shorting $100 million notional of 10-year U.S. Treasury bonds with a yield of 5.5% and
coupon rate of 5%.
a. Explain LTCM's rationale for going long corporate bonds and short Treasuries in their
convergence trade. What were the underlying assumptions behind this strategy?
b. Calculate…
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Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of asset-backed
financial securities at a geometric rate, specifically from $4 to $8 to $16 to $32 to $64 to $128 over a six-year time period. Over the
same period, the value of the assets underlying the securities rose at an arithmetic rate from $4 to $6 to $8 to $10 to $12 to $14.
If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the
value of the underlying asset suddenly and unexpectedly fell by $10?
Instructions: Enter your answer as a whole number.
%24
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2. Business and financial risk
The impact of financial leverage on return on equity and earnings per share
Consider the following case of Purple Panda Importers:
Suppose Purple Panda Importers is considering a project that will require $350,000 in assets.
• The company is small, so it is exempt from the interest deduction limitation under the new tax law.
• The project is expected to produce earnings before interest and taxes (EBIT) of $60,000.
• Common equity outstanding will be 25,000 shares.
• The company incurs a tax rate of 25%.
If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be
addition, Purple Panda's earnings per share (EPS) will be
Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The
company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar
Panda…
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Please see image to answer question.
The options for F are as follows;The firm should proceed with the recapitalization.The firm should not proceed with the recapitalization.
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Jolie Corp.is looking into the following transcations to change its risk profile. Which of the following transcations will for sure increase the risk-estimate of the company (and increase the borrowing interest rate) from the z-score perspective. Mark all that apply; more than one answer could be correct.
Sold held-to maturity investments for a profit
Write-off some obsolete inventory
Collect cash from accounts receivable
Buy long-term investments withcash
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Please do not give solution in image format ? And Fast Answering Please ? And Explain Proper Step by Step.
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4. Case study
A tech industries Inc. has initial resources equal to
$150 million. Because management estimates that
optimal operation requires an investment of $200
million, the firm must raise an additional $50
million in capital and that amount will be financed
through retention of some or all of existing
resources rather than distributing to stockholders
as dividend. Management projects that the
investment of $200 million in time 2 will create
$330 million in cash flow at time 2. Assume the
market rate of interest is 8% for funds raised.
a. If the original stockholders receive none of the
initially available resources as a dividend and
must raise the entire $50million on carry out
the optimal investment program.
What is the present value of the Atech
Industrial Inc.?
b. Suppose that the board of directors decides to
pay out to existing stockholders $80 million at
time 1 so that only $70 million of the $150
million of the firm's initial resources are
available to meet the future…
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hi expert please help me . account
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Note:-
• Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.
• Answer completely.
• You will get up vote for sure.
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I need the numbers for this account
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Provide an analysis of how the following investment patterns can be explained using theories of behavioral finance.
Once a firm's current earnings become known, the information content should be quickly digested by investors and incorporated into the efficient market price. However, if the security’s price is close to its 52-week high, investors are reluctant to bid prices up even if the company has an extremely positive earnings surprise.
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- Gator Fabrics Inc. currently has zero debt (i.e., wd = 0). It is a zero growth company, and additional firm data are shown below. Now the company is considering using some debt, moving to the new capital structure indicated below. The money raised would be used to repurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, by how much would the WACC change, i.e., what is WACCOld − WACCNew?arrow_forwardCompany X has $10M of excess cash (i.e., cash that is not used in the company's operations) and operating assets that will generate risky (i.e., uncertain) future cash flows with a present value today of $25M. It has no other assets. The company has risky zero-coupon bonds outstanding with a face value of $20M, and no other debt. Who is likely to gain and who is likely to lose from the following maneuvers? a) Company X pays a cash dividend of $10M to its shareholders. b) Company X halts operations and sells all of its operating assets for $15M. It invests the proceeds from this sale along with its $10M of existing cash in Treasury Bills (i.e., risk free bonds).arrow_forwardAlthough its own operations have shown no growth over the past decade, Hammerworks Inc. has built up a significant cash balance ($2.9 billion) in anticipation of a collapse in equity prices which it believes will create opportunities for valuable acquisitions. Following just such a correction, two potential targets are now being considered: Metallion has a current market capitalization of $1.1 billion, $550 million in 6% debt (YTM also 6%), and generates EBIT of $175 million annually with no growth (a 7.1% profit margin on annual sales of $1.4 billion). Goblikon has an enterprise value of $1.3 billion, a market valued D/E of 1.1, and has been growing its profits at 4% for the past several years (it currently has a P/E ratio of 10). In either case, Hammerworks would be expected to pay off the target’s bond holders in full as there is a change of control clause in their bond indentures. Since either acquisition would be paid for with cash, the firm expects that either acquisition…arrow_forward
- Although its own operations have shown no growth over the past decade, Hammerworks Inc. has built up a significant cash balance ($2.9 billion) in anticipation of a collapse in equity prices which it believes will create opportunities for valuable acquisitions. Following just such a correction, two potential targets are now being considered: Metallion has a current market capitalization of $1.1 billion, $550 million in 6% debt (YTM also 6%), and generates EBIT of $175 million annually with no growth (a 7.1% profit margin on annual sales of $1.4 billion). Goblikon has an enterprise value of $1.3 billion, a market valued D/E of 1.1, and has been growing its profits at 4% for the past several years (it currently has a P/E ratio of 10). In either case, Hammerworks would be expected to pay off the target’s bond holders in full as there is a change of control clause in their bond indentures. Since either acquisition would be paid for with cash, the firm expects that either acquisition…arrow_forwardKyma Inc. currently has zero debt. It is a zero growth company, and it has the data shown below. Now the company is considering using some debt, moving to the new debt/assets ratio indicated below. The money raised would be used to repurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, by how much would the WACC change, i.e., what is WACCold - WACCNew? New Debt/Assets 35% Orig. cost of equity, rs 10.0% New Equity/Assets 65% New cost of equity = rs 11.0% Interest rate new = rd 7.0% Tax rate 40.0% O1.72% O2.06% 1.38% 1.04%arrow_forwardLong-Term Capital Management (LTCM) implemented a convergence trading strategy involving corporate bonds and U.S. Treasuries. Expecting the spread between corporate bond yields and Treasury yields to narrow over time, LTCM took large leveraged positions, going long (buying) corporate bonds and short (selling) Treasuries. However, the 1998 Russian debt crisis triggered a flight to quality, causing corporate bond prices to fall and Treasury prices to rise, leading to a divergence of the spreads and massive losses for LTCM's trades. On July 1, 1998, LTCM initiated a convergence trade by going long $100 million notional of Baa-rated 10-year corporate bonds with a yield of 7.5% and coupon rate of 7%, and shorting $100 million notional of 10-year U.S. Treasury bonds with a yield of 5.5% and coupon rate of 5%. a. Explain LTCM's rationale for going long corporate bonds and short Treasuries in their convergence trade. What were the underlying assumptions behind this strategy? b. Calculate…arrow_forward
- Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of asset-backed financial securities at a geometric rate, specifically from $4 to $8 to $16 to $32 to $64 to $128 over a six-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from $4 to $6 to $8 to $10 to $12 to $14. If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the value of the underlying asset suddenly and unexpectedly fell by $10? Instructions: Enter your answer as a whole number. %24arrow_forward2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Purple Panda Importers: Suppose Purple Panda Importers is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $60,000. • Common equity outstanding will be 25,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be addition, Purple Panda's earnings per share (EPS) will be Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar Panda…arrow_forwardPlease see image to answer question. The options for F are as follows;The firm should proceed with the recapitalization.The firm should not proceed with the recapitalization.arrow_forward
- Jolie Corp.is looking into the following transcations to change its risk profile. Which of the following transcations will for sure increase the risk-estimate of the company (and increase the borrowing interest rate) from the z-score perspective. Mark all that apply; more than one answer could be correct. Sold held-to maturity investments for a profit Write-off some obsolete inventory Collect cash from accounts receivable Buy long-term investments withcasharrow_forwardPlease do not give solution in image format ? And Fast Answering Please ? And Explain Proper Step by Step.arrow_forward4. Case study A tech industries Inc. has initial resources equal to $150 million. Because management estimates that optimal operation requires an investment of $200 million, the firm must raise an additional $50 million in capital and that amount will be financed through retention of some or all of existing resources rather than distributing to stockholders as dividend. Management projects that the investment of $200 million in time 2 will create $330 million in cash flow at time 2. Assume the market rate of interest is 8% for funds raised. a. If the original stockholders receive none of the initially available resources as a dividend and must raise the entire $50million on carry out the optimal investment program. What is the present value of the Atech Industrial Inc.? b. Suppose that the board of directors decides to pay out to existing stockholders $80 million at time 1 so that only $70 million of the $150 million of the firm's initial resources are available to meet the future…arrow_forward
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