Questions and Answers of Corporate Finance 5th Edition

Why is net working capital always zero in an ideal economy, but positive in the real economy? Does this introduce any risks to a company?Use the following information to answer Questions 12–15: In
What impact did this change in payables policy have on Power Assets’ operating cycle? Its cash cycle?
What impact do you think the policy change had on Power Assets’ suppliers?
Is it ethical for large firms to unilaterally lengthen their payable periods, particularly when dealing with smaller suppliers? Is an 82-day payables period necessarily bad? Explain.
Why do you think Power Assets really reduced their payables period? Is their explanation that it would ‘control costs and optimize cash flow’ sensible? Will there be any direct or indirect cash
In April 2014, and with just £3.5 million in the bank and a monthly cost base of around £1 million, the Board of Directors of Rangers FC asked supporters to pay for the 2014/15 season tickets up
Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs.(a) A dividend is paid with funds received from a sale
Eurasian Natural Resources plc, a Kazakhstani firm listed on the London Stock Exchange, has total non-current assets of $4,938 million. Non-current liabilities are$1,038 million. Current assets,
Indicate the impact of the following on the cash and operating cycles, respectively. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change.(a) The
Assume that Next plc has projected the following quarterly sales amounts for the coming year:(a) Trade receivables at the beginning of the year are £145 million. Next plc has a 10-day collection
Consider the following financial statement information for Bulldog Ice plc. Calculate the operating and cash cycles. How do you interpret your answer? Item Inventory Accounts receivable Accounts
Marshall plc’s purchases from suppliers in a quarter are equal to 75 per cent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes and other expenses are 20 per cent
The following is the sales budget for Freezing Snow plc for the first quarter of 2015:Credit sales are collected as follows:65 per cent in the month of the sale.20 per cent in the month after the
Here are some important figures from the budget of Sagmo AB for the first quarter of 2015:The company predicts that 5 per cent of its credit sales will never be collected, 35 per cent of its sales
Here are the most recent balance sheets for the multinational mining firm, Anglo American plc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the
The sales budget for your company in the coming year is based on a 20 per cent quarterly growth rate with the first-quarter sales projection at £100 million.In addition to this basic trend, the
Wildcat SA has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the year after this one are projected at €250 million. Accounts receivable at the
Rework Problem 29 assuming the following: (a) Wildcat maintains a minimum cash balance of €45 million. (b) Wildcat maintains a minimum cash balance of €15 million.Problem 29,Wildcat SA has
Renault SA and Peugeot SA are competing automobile manufacturing firms. Download their annual financial accounts for the most recent period from each company’s website.(a) How are the current
1 Consider the following financial statement information for Orologio SpA: Calculate the operating and cash cycles. How do you interpret your answer? (40 marks)2 You have been hired by a
You have recently been hired by Wolgemut Manufacturing to work in its established treasury department. Wolgemut Manufacturing is a small company that produces highly customized cardboard boxes in a
Why do firms hold cash? What are the consequences of holding too little cash? Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash?
Show, using both the Baumol Model and the Miller–Orr Model, how a firm can determine its optimal cash balance. What are the advantages and disadvantages of each?
What options are available to a firm if it believes it has too much cash? How about too little?
Explain what is meant by the credit terms of a sale. Provide an example of a typical trade credit agreement.
What steps are involved in establishing a credit policy?
Is it possible to have an optimal credit policy? In this context, discuss the total credit curve and its impact on a firm’s approach to trade credit.
What are the five ‘C’s of credit? Give an example of what happens when one of the 5Cs is not met. Are there any other factors a firm should consider?
How can a firm use an ageing schedule of payments to maximize its total collection of outstanding debtors?
Konyagi plc has an average daily cash balance of£10,500. Total cash needed for the year is £65,000. The interest rate is 3 per cent, and replenishing the cash costs €17 each time. What are the
Saint-Michel SA needs a total of €54,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off €20,000 in securities and transfers the cash in. The
Each business day, on average, a company writes cheques totalling€125,000 to pay its suppliers. The usual clearing time for the cheques is 3 days. Meanwhile, the company is receiving payments from
Every month, your neighbour receives three cheques, one for £12,000, one for £7,000 and one for £3,000. The largest cheque takes 4 days to clear after it is deposited; the smallest one takes 5
A mail-order firm processes 50,000 cheques per month. Of these, 34 per cent are for €20 and 66 per cent are for €30. The €20 cheques are delayed 2 days on average; the €30 cheques are delayed
It takes Transocean about 8 days to receive and deposit cheques from customers. Transocean’s management is considering a new system to reduce the firm’s collection times. It is expected that the
Vedant plc disburses cheques every 2 weeks that average £370,000 and take 7 days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing
Starthub Ltd has an agreement with its bank whereby the bank handles Rm500 million in collections a day and requires a Rm40,000,000 compensating balance. Starthub is contemplating cancelling the
TByrne Ltd is currently holding €700,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by €360,000 per month. How much of the current cash holding should
SlapShot plc has a fixed cost associated with buying and selling marketable securities of £100. The interest rate is currently 0.021 per cent per day, and the firm has estimated that the standard
Grampian plc has a weekly cash requirement of £60,000. The cost of selling marketable securities to raise cash is £50. The interest rate is 7 per cent per annum.Determine the optimal order quantity
You place an order for 200 units of inventory at a unit price of £95. The supplier offers terms of 2/10, net 30.(a) How long do you have to pay before the account is overdue? If you take the full
Dalglish plc sells earnings forecasts for British securities.Its credit terms are 2/10, net 30. Based on experience, 65 per cent of all customers will take the discount.(a) What is the average
A firm offers terms of 2/9, net 40. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this
Muziek Stad NV has an average collection period of 52 days. Its average daily investment in receivables is €46,000. What are its annual credit sales?What is the receivables turnover?
XYZ plc has recently won a very large order to supply a retail chain, called TT Ltd, with items over the next two years. The size of any order may vary considerably and XYZ are obliged to deliver
Baker Ginger Ltd sells on credit terms of net 25. Its accounts are, on average, 9 days past due. If annual credit sales are £8 million, what is the company’s balance sheet amount in accounts
Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which
Champions SA is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Champions should proceed. Describe
Bruce Jacks plc is in the process of considering a change in its terms of sale. The current policy is cash only; the new policy will involve one period’s credit. Sales are 70,000 units per period
Clapton Erich GmbH sells 3,000 pairs of running shoes per month at a cash price of €90 per pair. The firm is considering a new policy that involves 30 days’ credit and an increase in price to
The factoring department of Inter Scandinavian Bank (ISB) is processing 100,000 invoices per year with an average invoice value of €1,500. ISB buys the accounts receivable at 3.5 per cent off the
Your firm has an average collection period of 34 days. Current practice is to factor all receivables immediately at a 2 per cent discount. What is the effective cost of borrowing in this case? Assume
Silicon Wafers plc (SW), is debating whether to extend credit to a particular customer. SW’s products, primarily used in the manufacture of semiconductors, currently sell for £1,850 per unit. The
Consider the following information about two alternative credit strategies:The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the
The Wiggins Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 400 bicycles. The average cost to the shop of a bicycle is £280. The
Dschungel AG is considering a change in its cash-only policy.The new terms would be net one period. Based on the following information, determine if Dschungel should proceed. The required return is 3
Lisa Tylor, CFO of Purple Rain Co., concluded from the Baumol model that the optimal cash balance for the firm is $10 million. The annual interest rate on marketable securities is 5.8 per cent. The
Gold Star Ltd and Silver Star Ltd both manage their cash flows according to the Miller–Orr model. Gold Star’s daily cash flow is controlled between£95,000 and £205,000, whereas Silver Star’s
Netal Ltd has annual sales of 50 million rand, all of which are on credit. The current collection period is 45 days, and the credit terms are net 30. The company is considering offering terms of
1 Leon Dung SA, a large fertilizer distributor based in the north of Spain, is planning to use a lockbox system to speed up collections from its customers located in the Castille y Leon region. A
Describe the three main types of acquisitions and provide a real life example of each type. Which type of merger do you think creates more value for shareholders? Explain.
Explain the concept of synergy and provide examples of sources of synergy.Where does synergy come from? Is it possible that a merged company will not benefit from synergies? Discuss.
Why do you think that M&A activity often clusters in time, causing M&A waves? What M&A waves can you identify from history? Are there any factors which you think are uniquely favourable to M&A
(a) Many explanations and justifications are made by acquiring (and sometimes target)managers for a merger. Review these justifications and discuss whether they are good or bad for shareholders.(b)
Outline the two broad methods of payment in M&A transactions. What might determine the method of payment, and what impact does this have on both the acquiring and the target firm?
Describe the main uncertainties that are involved in a merger analysis.Are mergers an ideal activity in which to use real option valuation? Discuss some of the ways in which a real option analysis
Discuss the main steps that are involved in a merger analysis.
Review the various tactics that a target firm’s management may use when trying to deter a hostile takeover attempt. For each tactic, provide a balanced discussion of whether they are good or bad
Compare and contrast a successful merger or acquisition with a failed one. What were the factors that contributed to the success and failure of the deal?
Managerial Motives for Takeovers Outline the managerial motives for takeovers.
Explain the acquisition method of accounting for mergers and acquisitions. What effect does expensing merger costs have on the viability of a potential merger or acquisition?
Divestitures Why would a firm wish to sell off its assets? If the sold divisions are so bad, why are buyers found for them?
Indicate whether you think the following claims regarding takeovers are true or false. In each case, provide a brief explanation for your answer.(a) By merging competitors, takeovers have created
During the financial crisis that engulfed most of Europe, two large banks, Lloyds TSB Group and HBOS, merged with each other to diversify risk. Is this a good or bad idea? Explain.
In 2012 News Corp was rumoured to be considering selling off its newspaper line. What is the benefit of a spin-off of this type? Why would another company buy the assets?
Are shareholder rights plans good or bad for equity-holders?How do you think acquiring firms are able to get around them? What effect do you think the legal dubiety of shareholder rights plans in
Many commentators have argued that differences in tax regulations, especially regarding mergers and acquisitions, have reduced the viability of this corporate activity. Do you agree with this?
Iberdrola, the Spanish electricity giant, has in recent years pursued an aggressive acquisition strategy throughout the world. Companies that have been acquired by the firm include Scottish Power
In 2012, a consortium of investors put forward a bid for Rangers Football Club plc. The bid details were as follows: £5,000,000 in cash; cancellation of an existing Rangers debt worth £8,000,000;
Falcon plc and Thor plc have entered into a stock swap merger agreement whereby Falcon will pay a 30 per cent premium over Thor’s pre-merger price of £30. If Falcon’s pre-merger price was £40,
Assume that ABC plc is planning to offer £30 billion cash for all of the equity in XYZ plc. Based on recent market information, XYZ is worth £20 billion as an independent operation. If the merger
Consider the following pre-merger information about firm X and firm Y:Assume that firm X acquires firm Y by paying cash for all the shares outstanding at a merger premium of £5 per share. Assuming
Assume that the following balance sheets are stated at book value. Construct a post-merger balance sheet assuming that Reflection plc purchases Lhanger plc, and both sets of accounts are presented
Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation. The following balance sheets represent the pre-merger book values for
Fresnillo plc, the silver and gold mining firm, is analysing the possible acquisition of Weir Group plc, the Scottish-based engineering firm. Assume both firms have no debt. Fresnillo believes the
The shareholders of Flannery SA have voted in favour of a buyout offer from Stultz Corporation. Information about each firm is given here:Flannery’s shareholders will receive one share of Stultz
Ziff Electrics (ZE) is a public utility that provides electricity to the whole Yorkshire region. Recent events at its Mile-High Nuclear Station have been discouraging. Several shareholders have
Consider the following pre-merger information about a bidding firm (firm B) and a target firm (firm T). Assume that both firms have no debt outstanding.Firm B has estimated that the value of the
In Problem 29, are the shareholders of firm T better off with the cash offer or the equity offer? At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the
Consider the following pre-merger information about firm A and firm B:Assume that firm A acquires firm B via an exchange of equity at a price of DKr20 for each share of B’s equity. Both A and B
Tazza is analysing the possible acquisition of Bichiery. Neither firm has debt.The forecasts of Tazza show that the purchases would increase its annual after-tax cash flow by £1.3 million
Farrods PLC has a market value of £800 million and 35 million shares outstanding. Redridge department store has a market value of £300 million and 25 million shares outstanding. Farrods is
Gentley plc and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here:Gentley currently has a bond issue outstanding
Plant AG is considering making an offer to purchase Palmer AG. Plant’s vice president of finance has collected the following information:Plant also knows that securities analysts expect the
The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different
1 Linfrae plc is a computer software development firm and is considering a hostile takeover of Jaffikake plc, a software distribution firm. Linfrae has been advised by its investment bankers that a
Birdie Golf has been in merger talks with Hybrid Golf Company for the past 6 months. Afterseveral rounds of negotiations, the offer under discussion is a cash offer of €550 million forHybrid Golf.
‘NPV is just a tool and as with any tool, it can be dangerous in the wrong hands.’(a) Discuss this statement. In what way do sensitivity analysis, break-even analysis and scenario analysis
Explain why a company might use a risk-neutral valuation approach for valuing real options. Is this method appropriate for traditional NPV?
Ross (1995) puts forward that there are three sources of value in a typical capital budgeting project. Explain these three sources using examples.

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