Questions and Answers of Corporate Finance Principles And Practice

Explain the meaning of economic value added (EVA). How can EVA help financial managers to create value for shareholders?
Recent research into the efficient market hypothesis has explored anomalies in share price behaviour. Briefly describe some of these anomalies and suggest possible explanations.
The following financial statements are extracts from the accounts of Hoult Ltd:Annual depreciation was c18 000 in year 1, c13 000 in year 2 and c11 000 in year 3.The 8 per cent bonds are redeemable
Comment on the following statement:‘It is not possible to test whether a stock market is strong form efficient. In fact, the existence of insider trading proves otherwise.’
Comment on the following statement:‘Ratio analysis using financial statements is pointless. Only economic value added(EVA) gives a true measure of the financial performance of a company.’
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
Given the following corporate objectives, provide a reasoned argument explaining which of them should be the main goal of the financial manager:(a) profit maximisation;(b) sales maximisation;(c)
Explain how a financial manager can, in practice, maximise the wealth of shareholders.
What goals might be pursued by managers instead of maximising shareholder wealth?
The primary financial objective of a company is stated by corporate finance theory to be maximising shareholder wealth, but this objective is usually replaced by the surrogate objective of maximising
Discuss how the concepts of agency theory can be used to explain the relationship that exists between the managers of a listed company and its shareholders. Your answer should include an explanation
You are given the following details about Facts of Life plc, a company in the conglomerate sector.Breakdown of activities by percentage of total annual company turnover:The directors of the company
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.
Explain the meaning of economic value added. How can EVA help financial managers to create value for shareholders?
The following financial statements are extracts from the accounts of Hoult Ltd:Annual depreciation was £18,000 in year 1, £13,000 in year 2 and £11,000 in year 3. The per cent bonds are
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
Discuss the importance of the efficient market hypothesis to the following groups:(a) shareholders concerned about maximising their wealth;(b) corporate financial managers making capital investment
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
MW has sales of £700,000 per year. Its costs as a percentage of sales are as follows:Raw materials are carried in inventory for two weeks and finished goods are held in inventory for three weeks.
XTC is planning a 1 for 4 rights issue at a 20 per cent discount to the current market price of £2.50. If investors wish to sell their ‘rights per existing share’, how much should they sell them
Brand plc generates profit after tax of 15 per cent on shareholders’ funds. Its current capital structure is as follows:The board of Brand plc plans to raise £160,000 from a rights issue to expand
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 capital structure.The bond issue is not
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 and a
Mansun plc is a listed company with the following capital structure.The 13 per cent bonds give Mansun plc the right to redeem them at any time before maturity by paying full market value to
Bugle plc has some surplus funds it wishes to invest. It requires a return of 15 per cent on bonds and you have been asked to advise whether it should invest in either of the following bonds:(a) Bond
What categories of lenders provide subordinated debt and what are their motivations?
What is the difference between contractual and structural subordination?
How does the inclusion of subordinated debt in a financing plan mitigate risks for senior lenders?
What are some of the circumstances in which the inclusion of subordinated debt in a project's financing plan may be most appropriate?
Under what circumstances would you expect a collective investment vehicle to accept deeply subordinated terms of subordination? Under what circumstances would you expect standard terms of
If a sponsor is assumed to have investment hurdle rates in a range of 20-25% per annum while commercial bank loans yield 300-500 basis points over London Interbank Offer Rate (LIBOR), what would you
A senior lender is willing to provide 12-year door-to-door funding to a project amounting to 35% of project costs. Equity is expected to provide 30% of project costs. In securing the balance of
Distinguish between the three different day counting conventions.
What is a roller coaster swap and what is its relevance to Project Finance?
Identify as many derivatives as you can that are used to hedge interest rates. How do they differ? In what situations, if any, would these be employed?
Why is it that we can apply the economic Theory of Comparative Advantage to interest rate swaps?
Explain the step-by-step mechanics in pricing a swap.
What step-by-step mechanics are involved in reversing a swap as well as determining "loss of bargain"? In the contexts of reversing a swap pursuant to a steeper yield curve (rising interests) as well
What kinds of commercial issues arise in the negotiation of an interest rate swap, and how are they typically resolved?
Using the data from Table All.l.l in Appendix 11.1, calculate the sixmonthforward rate for period 3. Table All.I. Quoted Spot Swap Rates Period Maturity (years) Notation Spot swap rate given (%) 1
What is meant by the offensive and defensive attributes of security?
What is meant by the terms creation, perfection and enforcement of security?
What is the difference between a floating lien and a floating charge, as these terms are used in a Project Financing?
Why do most lenders prefer the law governing of New York State or England to apply to the loan agreement in a Project Finance deal as well as many of the other finance documents?
What general principles are used with regard to the selection of governing law when creating security over a project's assets in a host country other than the US or England? What are the typical
What is a collateral trust and why is it important in a Project Finance context to the perfection and enforcement of security?
What are the two ways of foreclosing security if a direct agreement, or a pledge of shares, is part of the security of a project finance deal?
What general principles are relied upon to perfect security when a project is located in a host country other than the US or England?
What is a hypothecation in a common law country and how does it differ from a mortgage? What are the typical problems with a hypothecation that you would expect to encounter in a developing country?
Why is a pledge of ownership shares, or partnership interests, important in a Project Finance deal?
Describe the typical commercial issues that are negotiated pursuant to a direct agreement.
What is the difference between a monetary performance guarantee and a performance bond?
How does the nature of the guarantor's obligation differ when comparing monetary performance guarantees and performance bonds?
Identify the attributes of a monetary performance guarantee that are attractive to the beneficiary of such guarantee.
What is the difference between insurance and a guarantee?
Why do you think insurance, hedges or subordinated loans are considered to be credit enhancements?
What typical concessions to the project vehicle would you expect to find in an IA?
What are the risks covered by political-risk insurance? Identify the differences and overlaps between political-risk insurance and an IA.
List the credit enhancements that off-take and market-risk projects in a lower income developing country are likely to require. How are these likely to change as you go upwards through
What is FM and how does the IA protect against these types of events?
Who are the providers of political-risk insurance? Identify one specific multilateral institution. Give examples of bilateral providers of political-risk insurance. What are the advantages these
What tools are available to lenders with which to evaluate a Project Finance?
Describe the architecture of a model. Why is there such an emphasis on ratios in the outputs to a typical Project Finance model? What other output is emphasized in a Project Finance?
What are some of the differences in terms of Euro-market conventions between a financial model that is Project Finance-oriented and one that involves a traditional loan?
What kind of experts are available to assist lenders with due diligence?
Describe the five uses to which a Project Finance model is put to.
What are the four steps in determining whether a project needs more equity? Or more subordinated debt, as the case may be?
In what ways do you think that ratios are used to reduce lenders'risks? In what ways does their use in loan agreements shift risks from lenders to borrowers?
What are some of the internal policy constraints faced by lenders .when negotiating a loan profile?
Why do you think that lenders and borrowers would negotiate avidly the pace of equity draws?
What are some of the more important quantitatively driven covenants and in what way are they used to control the disposition of FCF?
What is the difference between FCF and CADS?
What is a CTS? When does it bind the project vehicle and the lenders?When does it cease?
What is a CTA? Briefly describe the significance of a CTA in a Project Finance.
When is voluntary prepayment permitted?
In what situations is the project vehicle required to make mandatory prepayments?
Describe the role of CPs in disbursement of loans. What are the consequences of non-compliance with CPs?
Why do lenders require the project vehicle both represent and warrant the same statement? What are the consequences of non-compliance with representations and warranties?
"Covenants in Project Financing restrict free cash flows." Discuss.
Distinguish between default and EOD. What are the remedies available to the lenders pursuant to an EOD?
Under what circumstances would the amendment and waiver of CTA provisions become necessary? How are these effected?
What are lenders' RDs? Discuss in brief the reasons they are grouped into three categories.
What are the project completion risks? How do lenders mitigate these risks?
Why and when do lenders require the sponsor(s) to provide additional support? Give some examples of additional sponsor(s) support common to all projects.
What is an "order of priority" under the AA? Why is it so important from the lenders' perspective?
Discuss the purpose of the DSRA. How is this account funded and for what reasons?
Discuss the purpose of the MMRA. How is the MMRA required balance calculated and funded?
What is an inter-creditor agent? What roles may the inter-creditor agent play in a Project Finance?
Discuss the role of a security trustee. What are the advantages of having a common security trustee?
What conditions will the project vehicle comply with before making any permitted investments and why?
Why do lenders require the project vehicle to grant them unrestricted access to review the books and records of the secured accounts?
Discuss the three phases of Project Development. What is the main activity that occurs in each phase?
Explain the special risks encountered by the project developer during the pre-bid stage of project development. Would your answer be different when considering the pre-award versus the post-award
List the general objectives of project sponsor(s) during the contract negotiation stage of project development. At what point in this stage would you say the project business plan, or offering
When in the project development stage is the sponsor(s) able to roughly calculate a debt service cover ratio?
At what point does the money-raising ~hase of project development end? What is the significance of this event?
Describe the broad objectives that the project sponsor(s) is trying to capture for the project vehicle at the time they negotiate the project agreements and the term sheet.
(a) The table on page 135 summarizes the bidding strategy followed by three bidders competing to win the award for setting up a 10 MW power plant, based on their yearly tariff proposals. Note that
Why are projects located in developing countries financed in US dollars, or other hard currencies?
How many boom periods have there been in the last 130 years in crossborder financing? What created these booms? What ended them? When and where did the art of Project Finance originate in these boom

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