Questions and Answers of Corporate Finance Principles And Practice

8.10 Choose one of the following seasonal time series:condmilk,hsales,uselec(a) Do the data need transforming? If so, find a suitable transformation.(b) Are the data stationary? If not, find an
8.9 For the mc oppe.r data:(a) if necessary, find a suitable Box-Cox transformation for the data;(b) fit a suitable ARIMA model to the transformed data using auto. arima ();(c) try some other
8.8 Consider the total net generation of electricity (in billion kilowatt hours) by the U.S. electric industry(monthly for the period 1985-1996). (Data set usmelec.)In general there are two peaks per
8.7 Consider the quarterly number of international tourists to Australia for the period 1999-2010. (Data set aus tou.ris ts.)(a) Describe the time plot.(b) What can you learn from the ACF graph?(c)
8.6 Consider the number of women murdered each year(per 100,000 standard population) in the United States(data set wmu.rde.rs).(a) By studying appropriate graphs of the series in R, find an
8.5 Use R to simulate and plot some data from simple ARIMA models.(a) Use the following R code to generate data from an AR(l) model with 1 = 0.6 and a 2= 1. The process starts with y1 = 0.-------- R
8.4 For the enplanements data, write down the differences you chose above using backshift operator notation.
8.3 For the following series, find an appropriate Box-Cox transformation and order of differencing in order to obtain stationary data.(a) usnetelec(b) usgdp(c) mcopper(d) enplanements(e) visitors
8.2 A classic example of a non-stationary series is the daily closing IBM stock prices (data set ibmclose). Use R to plot the daily closing prices for IBM stock and the ACF and PACF. Explain how each
8.1 Figure 8.24 shows the ACFs for 36 random numbers, 360 random numbers and for 1,000 random numbers.0 u, 0(a) Explain the differences among these figures.Do they all indicate the data are white
7.5 For this exercise, use the monthly Australian short-term overseas visitors data, May 1985-April 2005. (Data set:visitors.)(a) Make a time plot of your data and describe the main features of the
7.4 For this exercise, use the quarterly UK passenger vehicle production data from 1997:1-2005:1 (data set ukcars).(a) Plot the data and describe the main features of the series.(b) Decompose the
7.3 For this exercise, use the price of a dozen eggs in the United States from 1900-1993 (data set eggs). Experiment with the various options in the hol t () function to see how much the forecasts
7.2 (a) Apply Holt's linear method to the paperback and hardback series and compute four-day forecasts in each case.(b) Compare the SSE measures of Holt's method for the two series to those of simple
7.1 Data set books contains the daily sales of paperback and hardcover books at the same store. The task is to forecast the next four days' sales for paperback and hardcover books (data set
6.3 Figure 6.13 shows the result of decomposing the number of persons in the civilian labor force in Australia each month from February 1978 to August 1995.(a) Write about 3-5 sentences describing
6.2 The data below represent the monthly sales (in thousands)of product A for a plastics manufacturer for years 1 through 5 (data set plastics).1 2 3 4 5 Jan 742 741 896 951 1030 Feb 697 700 793 861
6.1 Show that a 3 x 5 MA is equivalent to a 7-term weighted moving average with weights of 0.067, 0.133, 0.200, 0.200, 0.200, 0.133, and 0.067.
5.2 The data below (data set texasgas) shows the demand for natural gas and the price of natural gas for 20 towns in Texas in 1969.City Average price P Consumption per customer C (cents per thousand
5.1 The data below (data set fancy) concern the monthly sales figures of a shop which opened in January 1987 and sells gifts, souvenirs, and novelties. The shop is situated on the wharf at a beach
4.3 An elasticity coefficient is the ratio of the percentage change in the forecast variable (y) to the percentage change in the predictor variable (x). Mathematically, the elasticity is defined as
4.2 The following table gives the winning times (in seconds)for the men's 400 meters final in each Olympic Games from 1896 to 2012 (data set olympic).1896 54.2 1928 47.8 1964 45.1 1992 43.50 1900
4.1 Electricity consumption was recorded for a small town on 12 randomly chosen days. The following maximum temperatures (degrees Celsius) and consumption(megawatt-hours) were recorded for each
2.5 Why is a Box-Cox transformation unhelpful for the cangas data?
2.4 Consider the sales of new one-family houses in the USA, Jan 1973 - Nov 1995 (data set hsales).(a) Produce some plots of the data in order to become familiar with it.(b) Split the hsales data set
2.3 Consider the daily closing IBM stock prices (data set ibmclose).(a) Produce some plots of the data in order to become familiar with it.(b) Split the data into a training set of 300 observations
2.2 Use the Dow Jones index (data set dowjones) to do the following:(a) Produce a time plot of the series.(b) Produce forecasts using the drift method and plot them.(c) Show that the graphed
2.1 For each of the following series (from the fma package), make a graph of the data. If transforming seems appropriate, do so and describe the effect.(a) Monthly total of people on unemployed
1.3 For case 3 in Section 1/5, describe the five steps of forecasting in the context of this project.
1.2 For cases 3 and 4 in Section 1 /5, list the possible predictor variables that might be useful, assuming that the relevant data are available.
1.1 For each of the four case studies in Section 1/5, what sort of data is involved: time series or cross-sectional data?
Calculate the following values assuming a discount rate of
per cent:(a) £500 compounded for five years;(b) the present value of £500 to be received in five years’ time;(c) the present value of £500 received each year for ever;(d) the present value of
Which of the following statements about the efficient market hypothesis is not correct?(a) If the stock market shows weak form efficiency, chartists cannot make consistent abnormal returns.(b) If the
Describe the five categories of ratios, list and define the ratios in each category, and, without referring to the calculations in the text, calculate each ratio for Boater plc.
Is it worth offering discounts to debtors to encourage prompt payment?
Discuss briefly the key features of debentures and ordinary loan stock.
A company has in issue some 9 per cent debentures, which are redeemable at par in three years’ time. Investors now require a yield of 10 per cent. What will be the current ex-interest market value
Illustrate with a simple example the calculation of 25 per cent reducing balance capital allowances.
Explain the meaning of the term ‘Monte Carlo simulation’.
Five years ago, Eranio plc issued 12 per cent irredeemable debentures at their par value of £100. The current market price of these debentures is £94. If the company pays corporation tax at a rate
Pollock has in issue 1 million ordinary shares, par value 25p and £100 000 of 10 per cent irredeemable debentures. The current ex-dividend market price of the ordinary shares is 49p per share and
Which of the following companies is likely to have the highest equity beta?(a) A highly geared supermarket company(b) A low-geared electricity generating company(c) A highly geared building materials
For which of the following reasons might a company considered to be risky have a lower beta factor than an equivalent company that is perceived as less risky?(a) The risky company has a lower
A company incorporates increasing amounts of debt finance into its capital structure while leaving its operating risk unchanged. Assuming that a perfect capital market exists with no taxation, will
One-third of the total market value of Johnson plc consists of loan stock with a cost of 10 per cent. York plc is identical in every respect to Johnson except that its capital structure is all equity
Which of the following statements concerning capital structure is not correct?(a) Bankruptcy risk is ignored in Miller and Modigliani’s first model.(b) Debt holders are not subject to the effects
If a company finds that its cost of capital has changed, does this affect the company’s profitability?
What is the significance of the arbitrage proof for Miller and Modigliani’s first paper on capital structure?
Which of the following statements lends support to dividend irrelevance rather than to dividend relevance theory?(a) Investors prefer the certainty of dividends to the uncertainty of capital
Which of the following statements best sums up recent trends in corporate dividend payments?(a) Nominal dividends per share have remained constant or slightly increased.(b) Companies have made large
Discuss the use of the P/E ratio and dividend growth methods of determining the value of a target company.
Briefly discuss the advantages and disadvantages of financing a takeover by an issue of convertible debentures.
In the following cases, state which type of exchange rate risk the company is facing and whether this risk is beneficial or harmful in nature.(a) A power-generating company imports coal from Germany,
Recommend internal hedging methods that a company can use in order to reduce translation risk and transaction risk.
A company is expecting to have to pay $345 000 in three months’ time. It is afraid that over this period the pound will depreciate against the dollar. If the current exchange rate is $1.78/£ and
A company is going to borrow £6m in three months’ time for a period of six months.It is afraid that interest rates will rise between now and the time that the loan is taken out. It intends to
For what strategic reasons may a company decide to build a manufacturing facility in another country?
Briefly describe the economic reasons why a company might choose to undertake foreign direct investment.
Explain the advantages and disadvantages of exporting, licensing and foreign direct investment as different ways of conducting international trade.
Describe the advantages and disadvantages of joint venture as a way of selling goods to another country.
Discuss whether foreign direct investment should be evaluated at the local level or at the parent company level.
Explain how political risk may be assessed by a company considering foreign direct investment.
Describe briefly the policies and strategies that a company could use to mitigate the problem of political risk.
Calculate the following values assuming a discount rate of 12 per cent:(a) £500 compounded for five years;(b) the present value of £500 to be received in five years’ time;(c) the present value of
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
Describe the main source of short-term finance for a company.
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
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
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
Mr Smart has c75 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
Loring plc has paid the following dividends in recent years:The dividend for 2009 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
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 £1000 worth of shares in
LMT is a company that has been listed on the London Stock Exchange since 2004.Institutional investors own approximately 45 per cent of the ordinary shares of the company. The recent financial
In the following cases, state which type of exchange rate risk the company is facing and whether this risk is beneficial or harmful in nature.(a) A power-generating company imports coal from Germany,
Which of the following will not help a company to hedge successfully against an increase in interest rates?(a) Selling interest rate futures contracts;(b) Swapping floating rate interest for fixed
Given the following list of US sterling currency options (all with three months to run)and the fact that the current spot rate is $1.55/£, which option do you expect to have the highest market
Explain how political risk may be assessed by a company considering foreign direct investment and identify the policies and strategies that it could use to mitigate the risk.(S-8)
It has become increasingly common for companies to offer their shareholders a choice between a cash dividend and an equivalent scrip dividend of shares. Briefly consider the advantages of scrip
(a) Critically evaluate the extent to which the following factors affect a company’s dividend policy.■ The industry in which the company operates.■ The level of infl ation.■ The company’s
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 dividends have been constant for 10 years. The company plans to finance a new investment project
It is 31 January 2009 and the managers of Dilbert are considering a change in the company’s dividend policy. Earnings per share for 2008 for the company were 22.8 pence, and the finance director
Briefly outline the economic reasons used to justify acquisitions.
Briefly outline the financial reasons used to justify acquisitions.
Explain why the DCF valuation method is preferred by academics.
Briefly describe four defences that could be used by a company after its board has received a takeover bid.
Explain why a company may look to divest part of its operations.
Describe briefly some of the important contributing factors which explain why shareholders of acquiring companies rarely benefit from takeovers.
Restwell plc, a hotel and leisure company, is currently considering taking over a smaller private limited company, Staygood Ltd. The board of Restwell is in the process of making a bid for Staygood
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
It is currently 1 January 2010 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
Two companies called Blur plc and Oasis plc are considering a merger. Financial data for the two companies are given below:The two companies have estimated that, due to economies of scale, the newly
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
Goldblade plc is about to launch a bid for Membrane plc. Both companies are in the light manufacturing industry. Goldblade plc is currently in the process of deciding how it will go about financing
It is 1 January 2010 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
Recommend internal hedging methods that a company can use in order to reduce translation risk and transaction risk. (S-1)
What are the major differences between OTC options and traded options? (S-1)
A company is going to borrow £6m in three months’ time for a period of six months.It is afraid that interest rates will rise between now and the time that the loan is taken out. It intends to

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