Questions and Answers of Corporate Finance 5th Edition

(a) In the context of capital budgeting, what is an opportunity cost? Why do we include this in a capital budgeting analysis? Give an example to support your answer.(b) What is meant by operating
In a hyperinflationary environment, how would you incorporate inflation into a capital budgeting analysis? Explain your methodology in words to a manager who is worried about the power of capital
What is meant by the terms ‘straight line depreciation’ and ‘reducing balance depreciation’? What are the advantages and disadvantages of each? Explain.
You have been appointed by a retail store as its new financial manager. The firm has opened a new store in the south of France that is specifically targeted at holiday makers. The firm has decided
Carlsberg is considering a new retail lager investment in Copenhagen. Financial projections for the investment are tabulated here. The Danish corporate tax rate is 25 per cent and the investment is
In the previous problem, suppose the project requires an initial investment in net working capital of €2,000 and the investment will have a market value of €1,000 at the end of the project.
In the previous problem, suppose the investment is depreciated using the reducing balance method at 25 per cent per annum. All the other facts are the same. What is the project’s year 1 net income
Your firm is contemplating the purchase of a new £925,000 computerbased order entry system. The system will be depreciated using reducing balance at 20 per cent per annum over its 5-year life. It
Dog Up! Franks is looking at a new sausage system with an installed cost of €390,000. This cost will be depreciated straight-line to zero over the project’s 5-year life, at the end of which the
An asset used in a 4-year project is depreciated at 20 per cent reducing balance for tax purposes. The asset has an acquisition cost of £9,300,000 and will be sold for £3,100,000 at the end of the
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs €2 million. The marketing department predicts that sales related to
Machine A costs £10,000 and costs £3,000 per year to maintain. It is expected to last 3 years. Machine B costs £8,000 and costs £5,000 per year to maintain. It is expected to last 2 years. Assume
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs 430,000 Norwegian kroner (NKr), has a 4-year life, and requires NKr120,000 in
Suppose in the previous problem that HISC always needs a conveyor belt system; when one wears out, it must be replaced. Which system should the firm choose now?
Small Hours LLC, a music events firm based in Dubai, expects to sell 10,000 festival tickets for different musical events around the world in perpetuity. This year, the average ticket will sell for
Etonic SA is considering an investment of €250,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year
Yell Group plc, the global advertising company, is evaluating the viability of a new machine to print telephone directories in emerging markets. The baseline machine costs £65,000, has a 3-year
A firm is considering an investment in a new machine with a price of £32 million to replace its existing machine. The current machine has a book value of £8 million and a market value of £9
Industrial Hooks plc is deciding when to replace its old machine.The machine’s current salvage value is £3 million. Its current book value is £4 million. If not sold, the old machine will require
Your company manufactures non-stick frying pans. However, it outsources the production of the glass covers for the pans. Until now, this has been a good option. However, your supplier has become
Dickinson Brothers is considering investing in a machine to produce computer keyboards. The price of the machine will be £400,000, and its economic life is 5 years. The machine will be depreciated
Aguilera Acoustics (AA) projects unit sales for a new seven-octave voice emulation implant as follows:Production of the implants will require €1,500,000 in net working capital to start and
A proposed cost-saving device has an installed cost of£360,000. The device will be used in a 5-year project and be depreciated using the reducing balance method at 20 per cent per annum. The
Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price
The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV
Your company has been approached to bid on a contract to sell 10,000 voice recognition (VR) computer keyboards a year for 4 years. Due to technological improvements, beyond that time they will be
Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for £225,000. The company can continue to rent the building to the
Genetic Engineering Research Studies Ltd (GERS) has hired you as a consultant to evaluate the NPV of its proposed toad house. GERS plans to breed toads and sell them as ecologically desirable insect
Sony International has an investment opportunity to produce a new 100-inch widescreen TV. The required investment on 1 January of this year is $32 million. The firm will depreciate the investment to
After extensive medical and marketing research, Pill plc believes it can penetrate the pain reliever market. It is considering two alternative products.The first is a medication for headache pain.
Petracci SpA manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for€5,600, including a set of eight chairs. The
Kicvarom Plc is considering the manufacture of a new product. The company has existing buildings that could be sold to buyers for €120,000. The balance sheet records the buildings as having a value
Bethesda Mining is a mid-sized coal mining company with 20 mines located in England and Scotland. The company operates deep mines as well as strip mines. Most of the coal mined is sold under
In many emerging market countries, concepts such as discount rates are significantly more cumbersome to estimate with any degree of accuracy. Furthermore, capital budgeting techniques can become
What are the main elements of corporate finance? How might these elements relate to typical family life?
Which of the following is not a core element of corporate finance?(a) The investment decision(b) The equity decision(c) The financing decision(d) Short-term capital management
Explain the assumption behind the statement: ‘The goal of financial management is to maximize the current share price.’ Why isn’t the goal to maximize the future share price?
Why do financial markets exist? Explain, in detail, how they facilitate the flow of capital around the economy.
Describe 4 securities that are traded in financial markets.
The section highlighting Google as a case study is special in many ways because of the firm’s meteoric success. Extend the case study on Google by looking at the title of each chapter in this book
In 2011, Elan Corp plc, the Irish biotechnology firm had €619 million in current assets and €1,403 million in total assets. It had €338 million in current liabilities and €1,253 million in
In the previous question, Elan Corp plc announced that it plans to increase its non-current assets by €100 million. If the company wishes to maintain its ratio of total liabilities to equity, how
You work for a private airport that has just purchased a new radar system from the UK for £3.5 billion. You have paid £100 million up front with the rest to be paid in 3 months. Explain how these
Your company has just purchased 20 fork-lift trucks and has two payment options. The first option is to pay £100,000 every month for 12 months. The second option is to pay £1,200,000 at the end of
You are assessing the viability of two projects. Project A has a 25 per cent chance of losing €1,000,000, a 50 per cent chance of breaking even and a 25 per cent chance of making €1,000,000
Explain what is meant by corporate social responsibility (CSR).
Do you consider corporate social responsibility (CSR) to be important to a firm’s management? Explain.
As a firm progresses throughout its life cycle it will typically move from seeking investment from private sources towards raising money on the capital markets.Explain why this is the case.
In 2014 it was reported that Apple had twice as much cash as the US government. Why could this be a problem for the firm?
You have read the first chapter of this textbook and have taken over a company that you now discover is losing £100,000 a week. At the rate things are going, the company will not have any cash left
Explain what is meant by socially responsible investment (SRI). In your opinion, is this a necessary function of business?
You have just joined a graduate scheme in a fund management company, and your manager tells you that ethical funds do not significantly outperform non-ethical funds, according to the bulk of
Many ‘experts’ suggest that maximizing profit should be the main financial goal of a corporation. Is this a correct view? Explain.
If you are in charge of a private firm and it doesn’t have a share price, what should be your goal as a financial manager? Explain.
You have been manager of a small company for 20 years and have become great friends with your employees. In the last month, foreign owners have bought out the company’s founding owner and have told
Your company’s new owners suggest the following changes to maximize the value of the firm. Write a brief report responding to each point in turn:(a) Add a cost of living adjustment to the pensions
Explain the difference between dealer and agency markets. Why do you think both types of markets exist? Is there one type of market that is the best? Explain.
If a firm is to cut costs as a result of falling revenues, how would this appear in the statement of financial position? Explain.
The multinational media company News Corporation has a dual class share structure. Why might the company do this? Are there any drawbacks?
You have the following information for the Swiss power and automation technology firm, ABB Ltd. All figures are in millions of Swiss francs (SFr).Give a brief interpretation of what you think ABB Ltd
Assume that ABB Ltd increased their non-current assets by SFr1 billion in 2016 and at the same time reduced their current assets by SFr500 million. Review the ways in which ABB would be able to
Assume that, in 2016, ABB purchased a new automation technology for SFr500 million. They paid this on credit and won’t be due to actually pay for the automation technology until 2018. The managers
Assume that instead of fully financing the expansion with debt, the managers of ABB Ltd say they wish to maintain the ratio of non-current liabilities to equity after the expansion. What would
The UK’s financial markets regulator states that its objectives are to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal, and improve the country’s business
The layout of financial accounts is rarely the same across companies and, sometimes, it can be difficult to establish a simple picture of a firm’s balance sheet. The accounts below are for Logik
In 2012, the Argentinian government nationalized YPF, which is a subsidiary of Repsol, the Spanish oil giant. YPF was integral to the operations of Repsol. The firm was set up 10 years earlier, and
The UK has a hybrid stock exchange where the largest companies are traded on an electronic order book and the smallest firms are traded through a competitive dealer market. Do you think this is a
Choose any company from your country and develop a chronology of the firm’s life cycle, from the business start-up, through initial expansion, to stock exchange listing and then (if applicable)
A skill any financial manager must have is to be able to find and understand financial information. Visit the websites of Volkswagen AG, Daimler AG and Renault SA. Download their financial accounts
You have been hired to help a well-known artist to commercialize her oil and acrylic paintings. Your client has never worked in industry since leaving art college, having been funded by academic
Differentiate between sole proprietorships, partnerships and corporations. What are the advantages and weaknesses of each?
Suppose you own shares in a company. The current share price is £2.50.Another company has just announced that it wants to buy your company and will pay £3.50 per share to acquire all the
Why do partnerships require formal agreements among the main shareholders when sole ownerships do not? Why are corporation articles and memoranda of understanding so complex compared to partnership
Review the OECD principles of corporate governance. Which principle relates to the ability of corporate executives to trade in the shares of their own company?
Give an overview of the UK Stewardship Code (2012)and explain its importance. What is the most important principle? Does the Code have any weaknesses?
What are the main similarities and differences between private and public limited companies? Why are all firms not publicly listed?
Why do you think corporate behaviour in bank-based financial systems would be different from market-based financial systems? How do you think other differences in the macro environment can affect
An investor survey by McKinsey & Co in 2000 found that over 80 per cent of investors would pay a premium for the shares of a well-governed company compared to a poorly governed one. Why do
Many regulators insist on public companies having board subcommittees such as the remuneration committee, audit committee and risk management committee. Why could this responsibility not simply be
Give an overview of the basic underlying models of corporate governance that exist around the world today. How do these different systems influence share ownership? To what extent are these models
In the Middle East, many companies have a Sharia Supervisory Board to which the board of directors reports. Evaluate the merits of such a governance structure and argue whether this approach to
What are the differences between a general partnership and a limited partnership? Why do firms choose to be partnerships instead of limited liability corporations?
Review the differences between various corporate forms. Why would an owner move from being a sole owner to a partner to a controlling shareholder in a limited corporation?
Discuss the evolution of corporate governance in the United Kingdom. In what way are the Codes linked to each other? Explain.
Is it possible to improve one governance principle in a firm but weaken another at the same time? Use an illustration to explain your answer.
How do differences in the macro-environment affect corporate governance?
In 2004, the OECD published its document, ‘Principles of Good Governance’. Discuss this report in detail and the major principles that are contained in it. In your opinion, what is the most
You have been appointed as a consultant for a very poor country in Africa, with no corporate governance regulations, and have been asked to formulate an appropriate corporate governance framework for
The audit committee of a firm is an integral part of its corporate governance. Explain what an audit committee is, why it is important, its main responsibilities, and how you can evaluate the audit
Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is an agency relationship and what is the main reason that an agency relationship exists in the
In recent years, governments have taken control of banks through buying their shares. What impact does this have on the lending culture of these banks? Is this consistent with shareholder
Discuss what is meant by a stakeholder. In what ways are stakeholders represented in two-tier board structures? How does this differ from companies with a unitary board structure? Use real examples
Regulators have developed a number of new policies with respect to institutional shareholder involvement in the running of firms. Review the reasons why regulators would prefer more or less
Why would we expect managers of a corporation to pursue the objectives of shareholders? What about bondholders?
Choose a developed and an emerging market economy and identify any differences and similarities between your chosen countries.
You have been hired as a consultant to evaluate the performance of a board of directors. What things would you look for? Why would shareholders want to hire a consultant to do such a job, when the
How do agency costs in a firm change as managers build up their shareholdings? What does it mean when we say that managers are entrenched? Provide some examples of real life cases where managers have
Critics have charged that compensation to top managers in the banking sector is simply too high and should be cut back. Look at the financial accounts of some banks in your region and determine the
In 2012, the Argentinian government nationalized YPF, which is a subsidiary of Repsol, the Spanish oil giant. YPF was integral to the operations of Repsol. The firm was set up 10 years earlier, and
As the financial manager of an unlisted manufacturing company based in Amsterdam, you have been tasked with preparing your firm for potential listing on Euronext. The company is closely held with

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