Questions and Answers of Corporate Finance 5th Edition

Take a look back at Figure 30.1 to answer the following questions:(a) If you have €100, how many British pounds can you get?(b) How much is one pound worth against the euro?(c) If you have £5
Use the information in Figure 30.1 to answer the following questions:(a) Which would you rather have, €100 or £100? Why?(b) Which would you rather have, 100 Swiss francs (SFr) or 100 Swedish krona
Suppose you purchase a May 2015 cocoa futures contract on 16 April 2015, at the last price of the day. What will your profit or loss be if the cocoa prices turn out to be $3,000 per metric ton at
In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold.Naturally, expansion would be desirable only if the
Your investment portfolio has earned returns of 400 per cent once in the last 10 years, zero per cent in 8 years out of the last 10 years and lost 90 per cent one year. Use Table 9.2. What was the
For the firm in the previous problem, suppose the book value of the debt issue is €20 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 7 years left
Corporate Insider Trading The cumulative abnormal returns pattern for British insider trading (Figure 13.7) suggests that executives have private information that they exploit to their advantage. Is
In the previous question, suppose the corporate tax rate is 28 per cent. What is EBIT in this case? What is the WACC? Explain.
Suppose a firm’s business operations mirror movements in the economy as a whole very closely – that is, the firm’s asset beta is 1.0. Use the result of the previous problem to find the equity
Define financial distress using the value-based and flow-based approaches. Do you think these are appropriate definitions for financial distress? Explain.
Review the turnaround strategies that firms can follow when in financial distress. Which do you think are most effective? Why?
What is the difference between administration and reorganization? What are some benefits of financial distress?
Do you think country-level institutional factors affect the turnaround strategies that financially distressed firms may adopt? What is the trade-off for policymakers between debtor-friendly and
Review the variables and decision rule in Altman’s Z -score model. Why do you think these variables are important in predicting financial distress? Is Altman’s Z-score successful in correctly
What do you think are the main causes of financial distress? Explain your answer using a case study firm of your choice.
What is the absolute priority rule? What are DIP loans? Where do DIP loans fall in the APR?
What are the costs to a company of financial distress? Discuss your answer using a case study company of your choice.
Firms that are in financial distress can use ‘prepack’ arrangements, where the financially distressed firm sells its assets and then immediately declares that it wishes to stop trading. This
Empirical evidence has shown that private workouts are faster and more cost-effective than a Chapter 11 bankruptcy procedure. Yet, according to Wruck (1990), over half of financial restructurings in
When Beacon Computers entered insolvency, it had the following balance sheet information:Assuming there are no legal fees associated with the bankruptcy, as trustee, what distribution of liquidating
When Masters Printing filed for bankruptcy, it entered administration.Key information is shown below. As trustee, what reorganization plan would you accept? Assets () Going concern value 15,000
Look at the club Z-scores. If you were the financial manager of a Scottish football club, what would you view as being the most important issue for the future viability of the industry? Develop a
Many analysts argue that football clubs are special cases and you cannot blindly apply standard Z-score models to the industry. Critically assess this argument and discuss why you think it may or may
Four of the 12 Scottish clubs have a negative value for T4. Does this mean they are insolvent? Explain. Refer to Real World Insight 29.2.Real World Insight 29.2In 2012, European football was rocked
Nine of the 12 Scottish clubs have a negative value for net working capital. Does this mean that these clubs are in danger of insolvency? Can you explain why in football, negative net working capital
Firms that are in financial distress sometimes increase the size of their assets. Explain why firms would pursue such a strategy instead of a more standard costcutting approach.
In 2012, Rangers Football Club went into administration with over £100 million in debt. The owner of the firm, Craig Whyte, held 85.3 per cent of the club’s shares and was also its only secured
Many publicly traded financially distressed firms are purchased by private equity funds and delisted from the stock exchange. Several years later they are brought back to the exchange for a new share
In 2012, the Game Group filed for insolvency. Using Altman’s Z-score analysis, would you have been able to predict its financial distress? What is your interpretation of the results? Are there any
In March 2012, the spread betting firm, Worldspreads Ltd, applied to go into administration. The decision was made when the company realized its cash balance of £16.6 million could not meet its
Explain the difference between a domestic bond, a foreign bond and a Eurobond, and give an example of each.
What is meant by triangular arbitrage?Is this likely to occur in real life? Explain.
Do you think purchasing power parity exists in the world economies? As country barriers fall, is purchasing power parity likely to become more prevalent? Does the empirical evidence support the PPP
Review the international parity conditions. Which ones do you think are likely to exist and which are less likely to be valid? During a global recession, do you think they are less or more likely to
Should international capital budgeting projects be assessed from the perspective of a multinational’s subsidiary, or from the parent company?Are there any circumstances under which this would
In 2008/09 the British pound depreciated by approximately 25 per cent on a trade-weight basis after the Bank of England reduced interest rates to a historically low level. In your opinion, did the
Why is country risk analysis important? Can multinationals reduce their exposure to country risk? Before the 2014 Scottish independence referendum, the Royal Bank of Scotland announced contingency
Suppose the exchange rate for the Australian dollar is quoted as$AUS3/£ in the spot market and $AUS4/£ in the 90-day forward market.(a) Is the British pound selling at a premium or a discount
The exchange rate for the Australian dollar is currently A$0.9641/US$.This exchange rate is expected to rise by 10 per cent over the next year.(a) Is the Australian dollar expected to get stronger or
Which of the following most accurately describes a Bulldog bond?(a) A bond issued by Vodafone in Frankfurt with the interest payable in British pounds.(b) A bond issued by Vodafone in Frankfurt with
Given that many multinationals based in many countries have much greater sales outside their domestic markets than within them, what is the particular relevance of their domestic currency?
Are the following statements true or false? Explain why.(a) If the central bank decreases interest rates in the United Kingdom, but holds them constant in the United States, then we would expect the
Some countries encourage movements in their exchange rate relative to those of some other country as a short-term means of addressing foreign trade imbalances. For each of the following scenarios,
We discussed five international capital market relationships: relative PPP, IRP, UFR, UIP and the international Fisher effect. Which of these would you expect to hold most closely? Which do you think
What are the types of foreign exchange risk a multinational faces? How do these risks arise? Explain.
If a South African firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in South Africa? How would you overcome them?
Explain motives companies might have for raising money on the international bond markets.
Use the information in Figure 30.1 to answer the followingFigure 30.1questions:(a) If the 3-month forward rate for the US dollar per euro F90 = $1.3215 (per €), is the dollar selling at a premium
Suppose the spot exchange rate for the South African rand is R15/£ and the 6-month forward rate is R16/£.(a) Which is worth more, the British pound or South African rand?(b) Assuming absolute PPP
Use Figure 30.1 to answer the following questions:(a) What is the cross-rate in terms of Rwandan franc per Thai baht?(b) Suppose the cross-rate is 12 Rwandan franc = 1 Thai baht. Is there an
Use Figure 30.1 to answer the following question. Suppose interest rate parity holds, and the current annual risk-free rate in the Eurozone is 3.8 per cent. Assume the UK one year forward rate is
The treasurer of a major British firm has £30 million to invest for 3 months. The annual interest rate in the United Kingdom is 0.45 per cent per month. The interest rate in the Eurozone is 0.6 per
Suppose the current exchange rate for the Polish zloty is Z5.1134/£. The expected exchange rate in 3 years is Z5.2/£. What is the difference in the annual inflation rates for the United Kingdom and
Suppose your company, which is based in Nantes, imports computer motherboards from Singapore. The exchange rate is given in Figure 30.1. You have just placed an order for 30,000 motherboards at a
Suppose the spot and 6-month forward rates on the Swedish krona are SKr10.7917/£ and SKr12.00/£, respectively. The annual risk-free rate in the United Kingdom is 2.5 per cent, and the annual
You observe that the inflation rate in the United Kingdom is 3.5 per cent per year and that T-bills currently yield 3.9 per cent annually. What do you estimate the inflation rate to be in(a)
Suppose the spot and 3-month forward rates for the Indian rupee are R68.81/€ and R61.8/€, respectively.(a) Is the rupee expected to get stronger or weaker?(b) What would you estimate is the
Suppose the spot exchange rate for the Tanzanian shilling is TSh2500/£. The inflation rate in the United Kingdom is 3.5 per cent and it is 8.6 per cent in Tanzania. What do you predict the exchange
The spot rate of foreign exchange between the United States and the United Kingdom is $1.6117/£. If the interest rate in the United States is 13 per cent and it is 8 per cent in the United Kingdom,
The Dutch firm, ABS Equipment, has an investment opportunity in the United Kingdom. The project costs £12 million and is expected to produce cash flows of £2.7 million in year 1, £3.5 million in
As a German company, you are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SFr 27.0 million. The cash flows from the project
From our discussion of the Fisher effect in this chapter, we know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation rate, h, can be written as follows:This is
On 29 March 2004, the €/$ exchange rate was €0.82/$ compared to €0.94/$ exactly one year before. On the same day, the £/$ exchange rate was £0.56/$ compared with £0.62/$ one year earlier.1
Larissa Warren, the owner of West Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company’s yachts in Europe. Jarek Jachowicz, the dealer, wants to add West
Explain the difference between a cash dividend, a stock dividend, a special dividend, and a stock buyback.
How is it possible that dividends are so important, but at the same time dividend policy is irrelevant? When a dividend is paid, give some reasons why the share price decline may not be the same as
Explain what is meant by the disappearing dividend phenomenon.What are the competing explanations for the phenomenon?
Stock buybacks are happening in rapid succession among companies all over the world. Is this good or bad news for shareholders? Explain.
Explain the importance of taxes in dividend policy. What are the real world factors that would encourage firms to follow a high dividend policy?
Explain the role of agency conflicts between managers, shareholders, and bondholders in corporate payout policy.
What is meant by dividend clienteles? If dividend clienteles exist, what does that imply for firms that adopt a new dividend policy in order to increase firm value?
What is the catering theory of dividends and how would it influence a manager looking to improve the value of her firm through dividend policy? What does the empirical evidence say about the catering
Under the assumptions set out by Modigliani and Miller, is a firm with a low payout dividend stream that uses retentions to finance investment more or less viable than a high payout firm that issues
Why would firms have a reverse split? Should a reverse split have any impact on the value of the firm?
Bodyswerve plc has experienced significant performance gains over previous years and there is no reason to expect any different in the future. The firm has engaged with a potential investor to
You are approaching retirement and are considering ways to minimize the tax bill from your investment portfolio. Assuming that you are only investing in equities within your own country, what is the
It is clear in many countries that investors prefer dividend-paying stocks to those that pay no dividends. How do you explain this if dividend policy is irrelevant? Explain.
‘We must ensure that dividends do not fall from one year to the next, even if our company makes a loss. However, if we make a profit then we should increase the dividend.’ Does this statement
MUG Company has a market capitalization of £1 billion and 20 million shares outstanding. Its Board has decided to distribute £100 million to shareholders through a repurchase programme. How many
Thesepe plc has declared a £2 per-share dividend and sells for£8.40 per share. Assuming that the tax rate on capital gains and dividends is zero, what do you think the ex-dividend price will be?
The shareholder equity accounts for Hexagon International are shown here:(a) If Hexagon shares currently sell for £25 per share and a 10 per cent stock dividend is declared, how many new shares will
For the company in Problem 18, show how the equity accounts will change if: (a) Hexagon declares a four-for-one stock split. How many shares are outstanding now?What is the new par value per
Eurasion Natural Resources Corporation currently has 2.4 million shares outstanding that sell for £5.16 per share. Assuming no market imperfections or tax effects exist, what will the share price be
The balance sheet for Severn Trent plc is shown here in market value terms. There are 2.4 billion shares outstanding.The company has declared a dividend of £0.40 per share. The equity goes ex
In the previous problem, suppose Severn Trent plc has announced it is going to repurchase £1 billion worth of equity. What effect will this transaction have on the equity of the firm? How many
The market value balance sheet for KL Air is shown here. KL Air has declared a 20 per cent stock dividend. The equity goes ex dividend tomorrow (the chronology for a stock dividend is similar to that
The company with the equity accounts shown here has declared a 12 per cent stock dividend when the market value of its equity is €20 per share. What effects on the equity accounts will the
In the previous problem, suppose the company instead decides on a five-for one stock split. The firm’s 70 cents per share cash dividend on the new (post-split) shares represents an increase of 10
Hillshire plc uses a residual dividend policy. (see Question 11.) A debt–equity ratio of 0.60 is considered optimal. Earnings for the period just ended were £524,292 and a dividend of £50,000 was
Worthington AG has declared an annual dividend of 1.50 Swiss Francs (SFr) per share. For the year just ended, earnings were SFr14 per share.(a) What is Worthington’s payout ratio?(b) Suppose
Red Zeppelin plc follows a strict residual dividend policy Its debt–equity ratio is 3.(a) If earnings for the year are £180,000, what is the maximum amount of capital spending possible with no new
Preti Rock SA predicts that earnings in the coming year will be€56 million. There are 12 million shares, and PR maintains a debt–equity ratio of 2.(a) Calculate the maximum investment funds
Mann Company belongs to a risk class for which the appropriate discount rate is 10 per cent. Mann currently has 100,000 outstanding shares selling at £100 each. The firm is contemplating the
You own 2,000 shares of equity in Avondale Property plc. You will receive a £0.25 per share dividend in one year. In 2 years, Avondale will pay a liquidating dividend of £0.75 per share. The
In the previous problem, suppose you want only £400 total in dividends the first year. What will your homemade dividend be in 2 years?Data from Previous problemYou own 2,000 shares of equity in
Flychucker SA is evaluating an extra dividend versus a share repurchase. In either case €5,000 would be spent. Current earnings are €0.95 per share, and the equity currently sells for €40 per
The net income of Novis AS is 32,000 kroner (DKr). The company has 10,000 outstanding shares and a 100 per cent payout policy. The expected value of the firm one year from now is DKr1,545,600. The
Newcastle Autos plc has a current period cash flow of £4.2 million and pays no dividends. The present value of the company’s future cash flows is £72 million. The company is entirely financed
Sharpe SA has just paid a dividend of €1.25 per share of equity. Its target payout ratio is 40 per cent. The company expects to have an earnings per share of €4.50 one year from now.(a) If the
Gecko Company and Gordon Company are two firms whose business risk is the same but that have different dividend policies.Gecko pays no dividend, whereas Gordon has an expected dividend yield of 6 per

Showing 1 - 100 of 1053