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Questions and Answers of
Corporate Finance
What mechanisms allow corporate raiders to get around the free rider problem in takeovers?
Based on the empirical evidence, who gets the value added from a takeover? What is the most likely explanation of this fact?
What are the reasons most often cited for a takeover?
What do risk arbitrageurs do?
What defensive strategies are available to help target companies resist an unwanted takeover?
The primary financial objective of a company is stated by corporate finance theory to be maximising the wealth of its shareholders, but this objective is usually replaced by the surrogate objective
Explain why maximising a company's share price is preferred as a financial objective to maximising its sales.
Discuss how the concepts of agency theory can be used to explain the relationship that exists between the managers of a listed company and the providers of its equity finance. Your answer should
You are given the following details about Facts of Life plc. Breakdown of activities by percentage of total annual company turnover: Department stores:
Discuss ways in which a company's shareholders can encourage its managers to act in a way which is consistent with the objective of maximising shareholder wealth.
The primary financial objective of corporate finance is usually taken to be the maximization of shareholder wealth. Discuss what other objectives may be important to a public limited company and
Discuss whether recent UK initiatives in the area of corporate governance have served to diminish the agency problem with respect to UK listed companies.
Critically evaluate the differing approaches taken by the US and UK governments to address the shortcomings of their corporate governance systems.
Distinguish between a primary and a secondary capital market and discuss the role played by these markets in corporate finance. What are the desirable features of primary and secondary capital
The following financial statements are extracts from the accounts of Hoult Ltd:Statements of profit or loss for years ending 31 DecemberFinancial position statements for years to 31 December Annual
Dayton has asked you for advice about his investment portfolio. He is considering buying shares in companies listed on the Alternative Investment Market. Green, a friend of Dayton, has told him he
Critically discuss the following statements about stock market efficiency: (a) The weak form of the efficient market hypothesis implies that it is possible for investors to generate abnormal returns
Discuss the importance of the efficient market hypothesis to the following parties: (a) Shareholders concerned about maximising their wealth; (b) Corporate financial managers making capital
Tor plc is a large company listed on the main market of the London Stock Exchange. The objectives of the company, in the current year and in recent years, are stated by its Annual Report to be as
Sec uses 60,000 tons of salt over a 50-week working year. It costs £100 to order salt and delivery follows two weeks later. Storage costs for the salt are expected to be £0.10 per ton per year. The
MW has sales of €700,000 per year. Its costs as a percentage of sales are as follows:...........................................%Raw materials.................20Direct
MC has current sales of £1.5m per year. Cost of sales is 75 per cent of sales and bad debts are 1 per cent of sales. Cost of sales comprises 80 per cent variable costs and 20 per cent fixed costs.
A company is planning to offer a discount for payment within 10 days to its customers, who currently pay after 45 days. Only 40 per cent of credit customers would take the discount, although
The finance director of Stenigot is concerned about the lax management of the company's trade receivables. Stenigot's trade terms require settlement within 30 days, but its customers take an average
Saltfleet is a wholesale merchant supplying the construction industry which operates through a number of stores and depots throughout the UK. It has one subsidiary, Irby, which manufactures
The following information has been extracted from the financial statements of Rowett: Statement of profit or loss extractsFinancial position statements extractsPowell, a factoring company, has
The finance director of Menendez is trying to improve the company's slack working capital management. Although Menendez's trade terms require settlement within 30 days, its customers take an average
Brand plc generates profit after tax of 15 per cent on shareholders' funds. Its current capital structure is as
Maltby plc, a company quoted on the London Stock Exchange, has been making regular annual after-tax profits of £7 million for some years and has the following long-term capital
Hanging Valley plc has issued share capital of 2m ordinary shares, nominal value €1.00. The board of the company has decided it needs to raise €1m, net of issue costs, to finance a new product.
Brag plc is raising finance through a rights issue and the current ex dividend market price of its shares is £3.00. The rights issue is on a 1 for 6 basis and the new shares will be offered at a 20
Mansun plc is a listed company with the following capital structure. ................................................................................€000 Ordinary shares, €1
Freeze plc is a listed company. It has been advised that its proposed 1 for 4 rights issue should be at a 15 per cent discount to its current ordinary share price of £4.20. The proposed rights issue
Bugle plc has some surplus funds that it wishes to invest. It requires a return of 15 per cent on corporate bonds and you have been asked for advice on whether it should invest in either of the
Laursen plc has in issue 10 per cent convertible bonds which will be redeemed in 10 years' time. The bonds have a nominal value of £100 and are currently selling at £93 per bond. Interest on the
Turner plc is considering whether to buy a machine costing £1,000 through a three-year loan with interest at 14 per cent per year. The machine would have zero scrap value at the end of its
(a) Discuss the factors which determine the market price of convertible bonds. (b) Marlowe plc has in issue bonds which are convertible in three years' time into 25 ordinary shares per bond. If not
Utterby is considering the purchase of a new machine which would enable the company to cut annual salaries by £130,000 per year.The machine would cost £480,000 if bought from the manufacturers,
Cold plc has decided to acquire equipment with a current market value of £700,000. A bank has offered a five-year loan at an interest rate of 13 per cent per year, provided it can reach agreement
Permafrost plc needs a new computer network but is uncertain whether to buy the system or to lease it from Slush plc. The system will cost £800,000 if bought and Permafrost plc would borrow to
The expected cash flows of two projects are given below. The cost of capital is 10 per cent.(a) Calculate the payback period, net present value, internal rate of return and return on capital
LJH plc is planning to buy a machine which will cost £900,000 and which is expected to generate new cash sales of £600,000 per year. The expected useful life of the machine will be eight years, at
* Brown Ltd is considering buying a new machine which would have a useful economic life of five years, a cost of £125,000 and a scrap value of £30,000, with 80 per cent of the cost being payable at
Better plc is comparing two mutually exclusive projects, whose details are given below.The company's cost of capital is 12 per cent.(a) Using the net present value method, which project should be
The finance director of Park plc is preparing financial plans and different departments have submitted a number of capital investment applications. The managing director has said that no more than
The finance manager of Willow plc is evaluating two mutually exclusive projects with the following cash flows.Willow's cost of capital is 10 per cent and both investment projects have zero scrap
The finance director of RM plc is considering several investment projects and has collected the following information about them.Projects D and E are mutually exclusive. The capital available for
The finance manager of Wide plc is evaluating two capital investment projects which may assist the company in achieving its business objectives. Both projects will require an initial investment of
Logar plc is considering the purchase of a machine which will increase sales by £110,000 per year for a period of five years. At the end of the five-year period, the machine will be scrapped.
Mr Smart has €75,000 invested in relatively risk-free assets returning 10 per cent per year. He has been approached by a friend with a 'really good idea' for a business venture. This would take the
Bing plc is evaluating the purchase of a machine and has the following information: Initial investment........................................£350,000 Residual
Scot plc is planning to invest in Glumrovia and because it is risky to invest there the company will require an after-tax return of at least 20 per cent on the project. Market research suggests that
Brinpool plc has been invited to build a factory in the small state of Gehell by the government of that country. The local currency is the Ked (K) and data on current and expected exchange rates are
DK plc is evaluating the purchase of a freeze dryer. Packets of frozen food will be sold in boxes of eight and the following information applies to each
R plc plans to invest £1m in new machinery to produce Product GF. Advertising costs in the first two years of production would be £70,000 per year and quality control costs would be 3 per cent of
Ring plc is evaluating the purchase of a machine to produce Product MP3, to which the following information applies: .............................................................€ per box Selling
GZ plc plans to build a factory in the USA for $3.4m. Additional investment in working capital of $500,000 would be needed and this would be financed by a loan from a US bank of $500,000. Annual
Ice plc has decided to expand sales in Northland because of increasing pressure in its domestic market. It is evaluating two alternative expansion proposals.Proposal 1Ice plc could increase
Discuss how portfolio theory can help individual investors maximise their utility.
You are considering investing in two securities, X and Y, and have the following information:(a) Calculate the expected return for each security separately and for a portfolio of 60 per cent X and
Clement plc has been investing surplus funds in a small portfolio of equity shares over the past few years. Details of the portfolio are as follows:The current market return is 12 per cent and the
You are given the following data which refers to the performance of the FTSE 100 and two companies over the last financial year.FTSE 100 Index at the end of
Mr Magoo is planning to invest £18m in one of two short-term portfolios. Both portfolios consist of four short-term securities from diverse industries. The correlation between the returns of the
The securities of companies Z and Y have the following expected returns and standard deviations: .................................................Z.............Y Expected return
Mr Moroley has just finished reading a textbook on portfolio theory and he is keen to put his newfound knowledge into action by investing £1,000. He has identified the efficient frontier for
Loring plc has paid the following dividends in recent years:The dividend for 20X5 has just been paid. The risk-free rate of return is 6 per cent and the market rate of return is 15 per cent. (a) If
Critically discuss whether the CAPM makes portfolio theory redundant.
You have the following information about the returns for the shares of Super Lux plc and the returns for the market:Given that the rate of return on Treasury bills is 8 per cent and that the
Calet plc pays corporation tax at 30 per cent and has the following capital structure:- Ordinary shares: 1,000,000 ordinary shares of nominal value 25p per share and market value of 79p per share. A
Icicle Works plc is a frozen food company that intends to diversify into electronics. Theproject has a return of 12 per cent and Icicle Works is trying to decide whether it should be accepted. To
Carbon and Short plc both operate in the same industry with the same business risk. Their earnings, capital structure, share prices and other data are as follows:Kitson holds £1,000 worth of
Paisley Brothers plc, a company producing paisley shirts, has net operating income of £2,000 and is faced with three options of how to structure its debt and equity: (a) To issue no debt and pay
The calculation of the WACC is straightforward in theory, but difficult in practice. Outline possible difficulties that may be experienced when trying to calculate the WACC.
Discuss problems that may be met in using the CAPM in investment appraisal.
You are given the following information about Jordan plc:You are also given the following information: Yield on Treasury bills..................................................7% Jordan plc equity
The following information has been taken from the accounts of Merlin plc:Notes(i) The current ex dividend market price of the ordinary shares of Merlin is £3.14. Both dividends and share price are
Critically discuss whether companies, by integrating a sensible level of debt into their capital structure, can minimise their weighted average cost of capital.
The finance director of Kingsize plc is currently reviewing the capital structure of the company. She believes that the company is not financing itself in a way that minimises its WACC. The
The decision about how much earnings to retain and how much to return to ordinary shareholders as a dividend is a key financial management decision. Discuss some of the factors that should be
(a) Stant has just announced an ordinary dividend per share of 20p. The past four years' dividends per share have been 13p, 14p, 17p and 18p (most recent dividend last) and shareholders require a
Ropeonfire is currently deciding on the level and form of its next dividend. It is considering three options:(i) A cash dividend payment of 20p per share;(ii) A 6 per cent scrip dividend;(iii) A
The ordinary shares of ZZZ are currently trading at 80p. The last dividend per share was 15p and its dividenads have been constant for ten years. The company plans to finance a new investment project
(a) It is said that financial management is concerned with investment decisions, dividend decisions and financing decisions. Critically discuss why financial management theory has claimed that only
LMT is a company that has been listed on the London Stock Exchange since 2010. Institutional investors own approximately 45 per cent of the ordinary shares of the company. The recent financial
It is 31 January 2016 and the managers of Dilbert are considering a change in the company's dividend policy. Earnings per share for 2015 for the company were 22.8p, and the finance director has said
Explain the major justifications likely to be put forward to explain the following types of acquisitions: (a) Horizontal acquisitions; (b) Vertical backwards and forwards acquisitions; (c)
Restwell plc, a hotel and leisure company, is planning to take over a smaller private limited company, Staygood Ltd, and needs to place a value on the company. Restwell has gathered the following
Carsley plc and Powell plc are planning to merge to form Stimac plc. It has been agreed that Powell's shareholders will accept three shares in Carsley for every share in Powell they hold. Other
What are the major considerations that an acquiring company has to take into account when deciding how to finance a proposed takeover?
It is currently 1 January 20X4 and Lissom plc is looking to divest itself of one of its subsidiaries in order to focus on its core business activities. Financial information relevant to the
The board of Hanging Valley plc wishes to take over Rattling Creek Ltd. Shown below are summarised financial data for the two companies:Hanging Valley's earnings and dividends have been increasing at
Two companies called Blur plc and Oasis plc are considering a merger. Financial data for the two companies are given below: Blur Oasis Number of shares issued.............
The managing directors of Wrack plc are considering what value to place on Trollope plc, a company which they are planning to take over in the near future. Wrack plc's share price is currently £4.21
Goldblade plc is about to launch a bid for Membrane plc. Both companies are in the light manufacturing industry. Goldblade plc is currently deciding how it will go about financing the takeover. You
It is 1 January 20X3 and Magnet plc is in the process of divesting part of its operations via a proposed management buyout (MBO). The buyout team is currently looking for venture capital to finance
Discuss the factors that may persuade a company to hedge an interest rate exposure by using OTC options rather than financial futures contracts.
Carrycan plc must make a payment of $364,897 in six months' time. It is currently 1 January. The company plans to hedge its transaction exposure and has collected the following information.Foreign
Discuss the factors that influence the price of traded options.
Two companies with the borrowing rates below are considering a swap agreement. ______________________________Floating rate_________________ Fixed rate Company
Discuss the problem of political risk in the context of foreign direct investment, and the difficulties that companies may face as a result of it.
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