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business
principles corporate finance
Questions and Answers of
Principles Corporate Finance
Why is the determination of the exchange parity important?
What is the difference between the relative value ratio and the exchange ratio?
When negotiating, is agreement first reached on the relative value or on the calculation method?
Why do shareholders in an acquired company agree to the dilution of their shareholdings after completion of the merger?
Where does the creation of value lie in a merger?
Why are the legal procedures related to mergers so onerous?
In what circumstances can a demerger lead to creation of shareholder value? And value for creditors?
Can the success of a merger be judged by comparing the market performance of the new entity with that of the reference index?
Can the success of a merger be judged by looking at the change in share price of the companies when the merger is announced?
Alpha AG is wholly owned by Mr Alpha and Beta AG is wholly owned by Mr Beta. The key figures for the two companies are as follows:Alpha acquires Beta. Calculate the shareholdings (as a percentage) of
Below are the key figures for Gamma plc and Delta plc:(a) Gamma acquires Delta. The criterion selected for calculation purposes is equity value. Calculate the old and new EPS, equity per share, and
Explain why an LBO is a type of capital reduction.
What risks are involved in an LBO?
Can mezzanine financing in the context of an LBO be compared with equity or debt?
In the context of an LBO, does the holder of senior debt take more or less risk than the holder of junior debt?
Can an LBO be carried out on a startup company?
In a secondary LBO, can an LBO fund accept that the management team does not reinvest part of the capital gains achieved on the first LBO in the new LBO? Why?
What are the different possible exit routes after an LBO?
How does corporate governance of an LBO differ from that of a listed company with no major shareholder?
How does corporate governance of an LBO differ from that of most unlisted family companies?
Why do companies go bankrupt?
What risks do you take if you buy a subsidiary of a group that you know is in financial distress?
Do the same types of conflict arise in the event of the bankruptcy of a partnership and that of a limited company? Why?
How in some countries can bankruptcy play a role in the survival of the company?
How do bankruptcy costs impact on the tax breaks available on debt?
Why are companies that are emerging from bankruptcy proceedings often strong competitors?
Why are companies in France that are emerging from bankruptcy proceedings rarely strong competitors?
Can a company with no debts go bankrupt? Can it destroy value?
Why is a company able to get back on its feet financially during the bankruptcy period?
Why do creditors agree to grant loans to companies during the bankruptcy period?
What are the pros of a creditor-friendly bankruptcy procedure for shareholders?
Name countries which have creditor-friendly bankruptcy procedures.
What are the three key objectives of a corporate treasurer?
What are the three cash positions for a company?
What is a value date?
What is a concentration account?
What is the main difference between national group pooling and international group pooling?
Does perfect daily balancing of accounts cost more or less than perfect notional pooling?
Is the risk of bankruptcy of a subsidiary an obstacle to cash pooling for a group which balances its accounts daily?
What is the main argument against full cash pooling for a group?
What sort of cash organisation is generally in place for highly decentralised groups?
What common practice is the principal of value dates based on?
Is an investment that can be quickly sold on a vast market without risk?
Can an investment yield more than a debt? What is then the consequence?
Why do treasurers avoid investing their cash in shares?
In 2006, ABN Amro created a new financial product, the Constant Proportion Debt Obligation, rated AAA by Standard & Poor’s and yielding 1% to 2% more than a AAA rated bond. What do you think?
What are the five financial risks that companies are exposed to?
Describe four ways for a company to deal with risk.
Use arbitrage to calculate forward selling of yens against euros at 3 months. What information do you need to do the calculation?
What is an FRA?
A Portuguese company imports maize from Mexico, which it in turn exports to Canada.The company pays and is paid at 3 months (the maize is in fact shipped direct from Mexico to Canada). Should it buy
What is a future?
What are the differences between OTC forward transactions and futures?
What role does a clearing house play?
Can credit derivatives be based on options?
Does a derivative product have to be sufficiently liquid to be attractive?
Can you provide examples of hedging products used by ordinary people?
What category of derivative products would personal injury insurance fit into?
Should corporate treasurers take advantage of any arbitrages that they detect on the markets?
Should traders take advantage of any arbitrages that they detect on the markets?
Excluding any costs, can a company hedge against all of its risks, taking the risk of opportunity into account? And the trader?
Calculate the future buy and sell price, at 3 months (dollar against euro) using the following information:◦ the 3-month euro rate is equal to 4 6/8 − 4 7/8%;◦ the 3-month dollar rate is equal
Calculate the 6-month interest rate of the dollar on the basis of the following information:◦ the 6-month euro rate is equal to 4 4/8 − 4 5/8%;◦ the euro is currently trading at $1.0210/20;◦
A market trader is offering a $500m loan agreement in 3 months, for a period of 3 months on the following terms: 3 3/4% − 3 7/8%. Using the information provided in Questions 1 and 2, can you
Is an arbitrage of this sort really without risk?
If a corporate treasurer finds himself in the situation described above, should he execute the arbitrage?
What is the main drawback of accounting profitability indicators?
Why do EVA adversaries describe it as a great marketing stunt?
What is a TSR calculated over one year?
Will a company that is making losses record positive economic profits or EVA?
Can a company with a positive net profit show a negative economic profit?
What is the sum of future EVA discounted to the cost of capital equal to?
Subject to what conditions is it possible to compare EPS before and after a deal?
What is your view of this quotation: “A series of positive EVA can only be a sign of two things: either of a monopoly that is more or less temporary (for example a high tech development) or a poor
Is a drop in return on equity synonymous with value destruction? Why?
Is a drop in return on capital employed (ROCE) synonymous with a value destruction?Why?
Can a company create value and have a negative TSR over one year? And over 10 years?
What does TSR correspond to in terms of investment choice?
If you were stranded on a deserted island with only one criterion for measuring value creation, which would you want to use? Why?
If EPS drops after a deal, does this necessarily imply value destruction?
If EPS rises after a deal, does this necessarily imply value creation?
Why does an accurate calculation of EVA or profitability mean that the balance sheet will have to be restated?
What is the drawback of company rankings based on EVA?
Do layoffs systematically lead to value creation?
Can value be created by developing new products and new markets or by reducing costs?
The hotel chain CIGA provides information to the market on value creation, measured by a ROCE calculated as the ratio between EBITDA and the historic value (i.e. gross before depreciation and
The group Lagardère states in its annual report that “the rate used to measure the cost of capital is the discount rate which is equal to the flow of net future dividends(excluding tax credits) at
How does using different scenarios differ from simple cash flow discounting?
In a simplified form, can the Monte Carlo method be implemented without a computer?
What does the theory of options contribute to the valuing of an investment?
Is the theory of options opposed to the theory of efficient markets?
Can a project that contains significant real options be valued properly by the NPV criteria?By the construction of scenarios? By the Monte Carlo method? By the certainty equivalent method?
Provide an example of a project where there is an option to abandon.
Provide an example of a project where there is an option to expand.
In practice, what is the most serious problem raised by real options?
What makes the contribution of real options attractive for operations managers?
An Internet portal aimed at pet owners has just developed a nuclear sewing machine EXERCISE and offers you the opportunity to invest in the industrialisation of this product. The project will last 5
How is risk measured in a market economy?
What does the β coefficient measure?
In the graph on page 391, which is the most volatile asset? What motivates investors to enter this market? Volatility can be measured mathematically by variance and standard deviation. RETURN OF SOME
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