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Questions and Answers of Corporate Finance

Goran plc is a UK company with export and import trade with the USA. The following transactions, in the currency specified, are due within the next six months:Purchases of goods, cash payment due in
Give a detailed explanation of how interest rate risk can be hedged using options and swaps. What are the advantages and disadvantages of these hedging methods?
Explain how a company can use financial futures to hedge its interest rate risks and identify any advantages and disadvantages that arise from their use.
The monthly cash budget of HYK Communications plc shows that the company will need £18 million in two months' time for a period of four months. Financial markets have been volatile recently and the
Go4it plc is a young dynamic company which became listed on the stock market three years ago. Its management is very keen to do all it can to maximise shareholder value and, for this reason, has been
(a) 'Managers and owners of businesses may not have the same objectives.' Explain this statement, illustrating your answer with examples of possible conflicts of interest. (b) In what respects can it
Discuss the importance and limitations of ESOPs (executive share option plans) to the achievement of goal congruence within an organisation.
(a) A group of major shareholders of Zedo plc wishes to introduce a new remuneration scheme for the company's senior management. Explain why such schemes might be important to the shareholders. What
The main principles of financial management may be applied to most organisations. However, the role of the financial manager may be affected by the type of organisation in which he or she
(a) The Cleevemoor Water Authority was privatised in 2000, to become Northern Water plc (NW). Apart from political considerations, a major motive for the privatisation was to allow access for NW to
You are an accountant with a practice that includes a large proportion of individual clients, who often ask for information about traded investments. You have extracted the following data from a
Beta plc has been trading for 12 years and during this period has achieved a good profit record. To date, the company has not been listed on a recognised stock exchange. However, Beta plc has
Collingham plc produces electronic measuring instruments for medical research. It has recorded strong and consistent growth during the past 10 years since its present team of managers bought it out
The gross yield to redemption on government stocks (gilts) are as follows: Treasury 8.5% 2000 .......................... 7.00% Exchequer 10.5% 2005 ....................... 6.70% Treasury 8% 2015
Calculate the net present value of projects A and B, assuming discount rates of 0 per cent, 10 per cent and 20 per cent. ________________________ A (£) _____________ B (£) Initial outlay
Brosnan plc generates cash flows of £5 million p.a. after allowing for tax and depreciation, which is used for reinvestment. It has issued 10 million shares. Shareholders require a 12 per cent
Leyburn plc currently generates profits before tax of £10 million, and proposes to pay a dividend of £4 million out of cash holdings to its shareholders. The rate of corporation tax is 30 per cent.
The directors of Yorkshire Autopoints are considering the acquisition of an automatic car-washing installation. The initial cost and setting-up expenses will amount to about £140,000. Its estimated
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each
Mr Cowdrey runs a manufacturing business. He is considering whether to accept one of two mutually exclusive investment projects and, if so, which one to accept. Each project involves an immediate
The directors of XYZ plc wish to expand the company's operations. However, they are not prepared to borrow at the present time to finance capital investment. The directors have therefore decided to
Raiders Ltd is a private limited company financed entirely by ordinary shares. Its effective cost of capital, net of tax, is 10 per cent p.a. The directors are considering the company's capital
Your firm uses the IRR method and asks you to evaluate the following mutually exclusive projects:Using the appropriate IRR method, evaluate these proposals assuming a required rate of return of 10
Argon Mining plc is investigating the possibility of purchasing an open-cast coal mine in South Wales at a cost of £2.5 million which the British government is selling as part of its privatisation
Consolidated Oilfields plc is interested in exploring for oil near the west coast of Australia. The Australian government is prepared to grant an exploration licence to the company for a five-year
You are the chief accountant of Deighton plc, which manufactures a wide range of building and plumbing fittings. It has recently taken over a smaller unquoted competitor, Linton Ltd. Deighton is
(a) Explain how inflation affects the rate of return required on an investment project, and the distinction between a real and a nominal (or 'money terms') approach to the evaluation of an investment
Bowers Holdings plc has recently acquired a controlling interest in Shaldon Engineering plc, which produces high-quality machine tools for the European market. Following this acquisition, the
Mikado plc is considering launching a new product involving capital investment of £180,000. The machine has a four-year life and no residual value. Sales volumes of 6,000 units are forecast for each
Devonia (Laboratories) Ltd has recently carried out successful clinical trials on a new type of skin cream, which has been developed to reduce the effects of ageing. Research and development costs in
The management of Gawain plc is evaluating two projects whose returns depend on the future state of the economy as shown below: Probability __________ IRRA(%) ___________
Z plc is a long-established company with interests mainly in retailing and property development. Its current market capitalisation is £750 million. The company trades exclusively in the UK, but
PFK plc is an undiversified and ungeared company operating in the cardboard packaging industry. The Beta coefficient of its ordinary shares is 1.05. It now contemplates diversification into making
Amos Ltd has operated as a private limited company for 80 years. The company is facing increased competition and it has been decided to sell the business as a going concern. The financial situation
The Board of Directors of Rundum plc are contemplating a takeover bid for Carbo Ltd, an unquoted company which operates in both the packaging and building materials industries. If the offer is
The most recent statement of financial position for Vadeema plc is given below. Vadeema is a stock market-quoted company that specialises in researching and developing new pharmaceutical compounds.
Spot the options in Enigma Drugs plc. The mini-case presented below incorporates five options. Can you identify the type of option, its length and exercise price? Recall that American options offer
Explain the factors influencing the price of a traded option and whether volatility of a company's share option price is necessarily a sign of financial weakness.
Frank purchased a call option on 100 shares in Marmaduke plc six months ago at 10p per share. The share price at the time was 110p and the exercise price was 120p. Just prior to expiry the share
ABC plc is a UK-based service company with a number of wholly owned subsidiaries and interests in associated companies throughout the world. In response to the rapid growth in the company, the
(a) Discuss: (i) The significance of trade creditors in a firm's working capital cycle, and (ii) The dangers of over-reliance on trade credit as a source of finance. (b) Keswick plc traditionally
International Golf Ltd operates a large warehouse, selling golf equipment direct to the public by mail order and to small retail outlets. The cash position of the company has caused some concern in
(a) The Treasurer of Ripley plc is contemplating a change in financial policy. At present, Ripley's statement of financial position shows that fixed assets are of equal magnitude to the amount of
Torrance Ltd was formed to produce a new type of golf putter. The company sells the putter to wholesalers and retailers and has an annual turnover of £600,000. The following data relate to each
Haverah plc is a manufacturer and distributor of denim garments. It employs a highly aggressive working capital policy, and uses no long-term borrowing. Highlights from its most recent accounts
Raphael Ltd is a small engineering business which has annual credit sales of £2.4 million. In recent years, the company has experienced credit control problems. The average collection period for
LEE is a manufacturing entity located in Newland, a country with the dollar ($) as its currency. LOR is a leasing entity that is also located in Newland. LEE plans to replace a key piece of machinery
Shaw Holdings plc has 20 million ordinary shares of 50p in issue. These shares are currently valued on the Stock Exchange at £1.60 per share. The directors of Shaw Holdings believe the company
The managing director of Lavipilon plc wishes to provide an extra return to the company's shareholders and has suggested making either:(i) A two-for-five bonus issue (capitalisation issue) in
Netherby plc manufactures a range of camping and leisure equipment, including tents. It is currently experiencing severe quality control problems at its existing fully depreciated factory in the
Laceby manufactures agricultural equipment and is currently all-equity financed. In previous years, it has paid out a steady 50 per cent of available earnings as dividend and used retentions to
Pavlon plc has recently obtained a listing on the Stock Exchange. Ninety per cent of the company's shares were previously owned by members of one family, but, since the listing, approximately 60 per
Mondrian plc is a newly formed company which aims to maximise the wealth of its shareholders. The board of directors of the company is currently trying to decide upon the most appropriate dividend
The directors of Zeus plc are considering opening a new manufacturing facility. The finance director has provided the following information:Initial capital investment: £2,500,000.Dividends for the
RH plc manufactures machine tools. It has issued two million ordinary shares, quoted at 168 pence each, and £1 million 10 per cent secured debentures quoted at par. To finance expansion, the
Celtor plc is a property development company operating in the London area. The company has the following capital structure as at 30 November 2014. £000 £1 ordinary
Redley plc, which manufactures building products, experienced a sharp increase in operating profit (i.e. profits before interest and tax) from £27 million in 2012-13 to £42 million in 2013-14 as
Kipling plc is a food manufacturer which has the following long-term capital structure: £ £1 ordinary shares (fully paid).................2,500,000 Share premium
(a) Berlan plc has annual earnings before interest and tax of £15 million. These earnings are expected to remain constant. The market price of the company's ordinary shares is 86 pence per share cum
The ordinary shares of Stanley plc are quoted on the London Stock Exchange. The directors, who are also major shareholders, have been evaluating some new investment opportunities. If they go ahead
Claxby is an undiversified company operating in light engineering. It is all-equity financed with a Beta of 0.6. Total risk is 40 (standard deviation of annual return). Management want to diversify
The directors of Gross plc have made a 850p per share cash bid for Klinsmann plc, a company that is in a similar line of business. The summarised accounts of these two companies are as
Dangara plc is contemplating a takeover bid for another quoted company, Tefor plc. Both companies are in the leisure sector, operating a string of hotels, restaurants and motorway service stations.
Larkin Conglomerates plc owns a subsidiary company, Hughes Ltd, which sells office equipment. Recently, Larkin Conglomerates plc has been reconsidering its future strategy and has decided that Hughes
Exchange-traded foreign currency option prices for dollar/sterling contracts are shown below:Option prices are in cents per £. The current spot exchange rate is $1.9405-$1.9425/£.RequiredAssume
A selected bundle of goods costs £100 in the UK, and a similar bundle costs 1,200 krona (DKR) in Denmark. People generally expect the rate of inflation to be 5 per cent in the UK and 3 per cent in
The following situation is observed in the money markets. Sterling: US dollar exchange
Europa plc is a UK-based import-export company. It is now 15 May and the following transaction has been agreed: The sale of pine furniture worth $1,250,000 to the USA receivable on 15 August. $/£ FX
Slade plc is a medium-sized UK company with export and import trade links with US companies. The following transactions are due within the next six months. Transactions will be in the currency
Kay plc a UK-based chemical firm but with plants in Germany and the Netherlands, manufactures man-made fibres. It would like to expand its exports to Latin America and the country of Copacabana, in
Brighteyes plc manufactures medical and optical equipment for both domestic and export sale. It is investigating the construction of a manufacturing plant in Lastonia, a country in the former Soviet
A professional accountancy institute in the UK is evaluating an investment project overseas in Eastasia, a politically stable country. The project involves the establishment of a training school to
Summarize what you will accomplish studying personal finance.
Where is the United States in the economic cycle now, and where does it seem to be heading? List some indicators that suggest in which direction it may move.
What are some common mistakes that people make in personal finance? Name two that might be the worst, and why?
(a) Victor and Maria regularly buy and sell a number of items on eBay, Craig's List, and through the free community newspaper, from which they earn about $4,000 each year. What is the accumulated
Samantha Beliveau of Ames, Iowa, is a senior in college, majoring in nutrition. She anticipates getting married a year or so after graduation. Samantha has only one elective course remaining and is
What is career planning and why is it important?
How do your values and interests impact your life-style trade-offs in career planning?
Is college worth the cost? Why or why not?
How does one put a market value on an employee benefit?
Give some examples of legal employment rights.
Offer suggestions on correctly assembling a résumé and what style formats are available.
Give three suggestions on how to succeed in an interview.
Give two career advancement tips.
(a) If a new employer offered Belinda $80,000 to move and the relative cost index for the new community was 116, how does that compare to her current salary of $77,000 in Kansas City assuming the
Summarize the content in Figure 3-1, the overview of effective personal financial planning.
What is the biggest financial worry of most individuals, and what can they do about it?
Summarize how financial goals follow from one's values.
Define the balance sheet and give two examples of how to increase one's net worth.
Define the cash-flow statement and explain what it does.
How should assets and liabilities be valued for the balance sheet, and why?
Distinguish between fixed and variable expenses, and give two examples of each.
Explain why setting financial goals is an important step in budgeting.
How might one go about revising budget estimates to create a balanced budget?
Explain what a cash-flow calendar accomplishes. Name three techniques to control spending.
Name different ways to handle budget variances.
What are two of your most important personal values? Give an example of how each of those values might influence your financial plans.
Do you have a budget or spending plan? Why or why not? What do you think are the two major reasons why people do not make formal written budgets?
Thomas Green, of Laramie, Wyoming, has been a retail salesclerk for six years. At age 35, he is divorced with one child, Amanda, age 7. Thomas's salary is $46,000 per year. He regularly receives $400

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