Questions and Answers of Corporate Financial Management

=+b If the interest rates available on government bonds are 6 per cent in the Eurozone and 9 per cent in the USA, and the interest rate parity theory holds, what is the current one-year forward rate?
=+10 The spot rate between the euro and the US dollar is €1.77/US$ and the expected annual rates of inflation are expected to be 2 per cent and 5 per cent respectively.a If the purchasing power
=+A three-month sterling put, Malaysian dollar call currency option with a strike price of MS5.425/£ for M$600,000 is available for a premium of M$15,000.Required Discuss and illustrate three
=+The Malaysian interest rate is 3 per cent per quarter.Lozenge has all its money tied up in its operations but could borrow in sterling at 3 per cent per quarter (three months) if necessary.Forex
=+9* (Examination level) Lozenge ple has taken delivery of 50,000 electronic devices from a Malaysian company. The seller is in a strong bargaining position and has priced the devices in Malaysian
=+b Describe the expectation theory of foreign exchange.
=+8 a The rate of interest available on a one-year government bond in Canada is 5 per cent. A similar-risk bond in Australia yields 7 per cent. The current spot rate of exchange is C$1.02/AS. What
=+b What factors prevent the PPP always holding true in the short run?
=+7 a A basket of goods sells for SFr2,000 in Switzerland when the same basket of goods sells for £1,000 in the UK. The current exchange rate is SFr2.0/f. Over the forthcoming year inflation in
=+5 British Steel (Corus) suffered greatly as a result of the high value of sterling because it is a major exporter (as are many of its customers). Consider the range of approaches British Steel
=+b Explain why it may not always make sense for a company to hedge forex risk.
=+a three-month American-style rand put, sterling call option is available for R150m with a strike price of R7.5/f for a premium payable now of £400,000 on the over-the-counter market.Required Show
=+a A UK company exports machine parts to South Africa on three months' credit.The invoice totals R150m and the current spot rate is R7.46/f. Exchange rates have been volatile in recent months and
=+4+(Examination level)
=+d Discuss the relative merits of using forwards and options to hedge forex risk.
=+c A six-month forward is available at NZ$1.09/AS. Show how risk can be reduced using the forward.
=+b If the spot rate of exchange six months later is NZ$1.05/AS what exchange rate gain or loss will be made by the Australian exporter?
=+2 On 1 April an Australian exporter sells A$10m of coal to a New Zealand company.The importer is sent an invoice for NZ$11m payable in six months. The spot rate of exchange between the Australian
=+What is the cost of buying ¥100,000?
=+How many yen would be received from selling £1m?c d
=+b What is the cost of £500,000?
=+a How many pounds will a company obtain if it sold ¥1m?
=+1 Answer the following given that the rate of exchange between the Japanese yen and sterling is quoted at Y£188.869 - 189.131;
=+12 What is the expectations theory?
=+11 Describe the relationship between spot rates and forward rates under the interest rate parity (IRP) theory.
=+10 Explain the purchasing power parity (PPP) theory of exchange-rate determination.
=+7 How does a currency future differ from a currency forward?
=+6 What is a money market hedge, and what are leading and lagging?
=+3 Define the following:a transaction risk;b translation risk;economic risk.
=+outline the theories designed to explain the reasons for currency changes.
=+describe techniques for reducing the impact of foreign exchange changes on the competitive position of the firm;
=+denominated in another currency, when translated into home-currency terms, are distorted;
=+consider methods of dealing with the risk that assets, income and liabilities
=+describe hedging techniques to reduce the risk associated with transactions entered into in another currency;
=+explain the role and importance of the foreign exchange markets;
=+2 Investigate the extent of derivatives use by the treasury department of a firm you know well. Explain the purpose of derivatives use and consider alternative instru-ments to those used in the
=+Describe as many uses of options as you can by a firm you know well. These can include exchange-traded options, currency options, other OTC options, corporate uses of options (for example
=+13 Speculators, hedgers and arbitrageurs are all desirable participants in the derivatives markets. Explain the role of each.ssignments
=+12 Invent examples to demonstrate the different hedging qualities of options, futures and forwards.
=+d Compare short-term interest-rate futures and FRAs as alternative hedging tech-niques for a situation such as Red Wheel's.
=+What is the effective rate of interest after taking account of the derivative transac-c tion if three-month spot rates are 7 per cent in December? Show the loss on the derivative.
=+Show the gain on the derivative.
=+b What is the effective rate of interest payable by Red Wheel after taking account of the derivative transaction if three-month spot rates are 10 per cent in December?
=+Red Wheel ple expects to need to borrow £15m at floating rate in late December for three months and is concerned that interest rates will rise between August and December.Assume: No transaction
=+10 Three-month sterling interest-rate futures are quoted as follows on 30 August:£500,000 points of 100%Settlement price Sept.91.50 Dec.91.70 Mar.91,90
=+d Describe a 'floor' and show how it can be used to alleviate the cost of a cap.
=+c Black can buy a ten-year interest-rate cap set at a Libor of 8.5 per cent. This will cost 4 per cent of the amount covered. Show the payment flows if in the fourth year Libor rises to 10 per cent.
=+b What are the drawbacks of this swap arrangement for Black?
=+9" a Black plc has a £50m ten-year floating-rate loan from Bank A at Libor + 150 basis points. The treasurer is worried that interest rates will rise to a level that will put the firm in a
=+8* A corporate treasurer expects to receive £20m in late September, six months hence.The money will be needed for expansion purposes the following December. However in the intervening three months
=+7 (Examination level) A buyer of a futures contract in Imaginationum with an underly-ing value of £400,000 on 1 August is required to deliver an initial margin of 5 per cent to the clearing house.
=+d Briefly comment on the differences between the two hedging strategies.
=+Draw a profit/loss diagram for each strategy. Show the value of the underlying portfolio at different index levels, the value of the derivative and the combined value of the underlying and the
=+b What are the profits/losses under each strategy if the FTSE 100 Index moves to 4000 or 6000 in March?
=+6" A manager controlling a broadly based portfolio of UK large shares wishes to hedge against a possible fall in the market. It is October and the portfolio stands at £30m with the FTSE 100 Index
=+Assume: No transaction costs. Required a Imagine you write a December 180 put on 14 August. Draw a graph showing your profit and loss at share prices ranging from 100p to 250p. b Add to the graph
=+iii Discuss the relative merits of using traded options rather than futures for speculation.5 On 14 August British Biotech traded options were quoted on LIFFE as follows:Calls Puts Option
=+ii What would the profit (loss) be if the index fell to 4500 in December under each strategy?
=+What would the profit (loss) be if the index rose to 5500 in December under each strategy?
=+a Sell five FTSE 100 Index futures on Euronext.liffe with a December expiry, cur-rent price 5086.Extracts from the Financial Times FTSE 100 Index option (LIFFE) (4997) £10 per full index point
=+4 Adam, a speculator, is convinced that the stock market will fall significantly in the forthcoming months. The current market index (14 August) level is 4997 (FTSE 100).He is trying to decide
=+Which options are in-the-money and which are out-of-the-money?
=+3 What is the intrinsic and time value on each of the following options given a share price of 732p?Exercise price Calls Puts Feb Feb, 700 5511 750 28 40
=+2 Palm's share price stands at £4.80. You purchase one March 500p put on Palm's shares for 52p. What is your profit or loss if you hold the option to maturity under each of the following share
=+What is meant by intrinsic value, time value, in-the-money, at-the-money and out-of-the-money? Use the above table to illustrate.
=+1 You hold 20,000 shares in ABC plc which are currently priced at 500p. ABC has developed a revolutionary flying machine. If trials prove successful the share price will rise significantly. If the
=+13 Why do the over-the-counter markets in derivatives and the exchange-based deriva-tives markets coexist?
=+12 Distinguish between a hedger, a speculator and an arbitrageur,
=+11 Describe what is meant by a swap agreement and explain why some of the arrange-ments are entered into.
=+10 Explain forward rate agreements, caps, floors and collars.
=+9 Describe the following:clearing house initial margin marking to market variation margin
=+8 How do futures differ from forwards?
=+6 List and briefly describe the application of options to industrial and commercial organisations.
=+3 Describe the following:traded option. out-of-the-money option call option intrinsic value put option· time value traditional option index option.in-the-money option option writer
=+1 What are derivatives and why do they have value?
=+ show the value of forwards, futures, FRAs, swaps, caps and floors markets by demonstrating transactions which manage and transfer risk.
=+explain the nature of options and the distinction between different kinds of options, and demonstrate their application in a wide variety of areas;
=+merger under examination. Write a report and make recommendations for improve-ment should any future mergers be contemplated.
=+Obtain as much information as you can on a recent merger. Relate the elements dis-cussed in this chapter (merger motives, process, planning and integration) to the
=+9 (Examination level) Mergers fail to produce value for the shareholders of acquirers in many cases. Describe and explain some reasons for merger failure.
=+8 (Examination level) The directors of Trajectory ple have decided to expand rapidly through mergers. You have been asked to explain the process itself, from appointing an adviser to the offer
=+7 (Examination level) Some of the reasons put forward for mergers are beneficial to society, some to shareholders, some to the management of the acquirer and others result in benefits to more than
=+e Some mergers produce increased returns for the acquirer's shareholders, whereas others do not. Discuss the reasons for merger failure from the acquirer's share-holders' perspective.
=+b If you were the managing director of Black, what is the maximum number of Black shares you would offer for every 10 Blue shares? (Fractions of shares may be used.}
=+6 White ple and Black ple have made all-share bids for Blue plc.White Black++White Black Blue Blue Blue Pre-merger share price£3£1 Number of shares issued 1m 2m 1.5m Market capitalisation£4m
=+d If none of the merger benefits is realised, because of problems of integration, what is the loss or gain in value to A and B shareholders under both the cash offer and the shares offer?
=+c If A gave one of its shares for seven of B's what value would be available for each group of shareholders?
=+b If A paid £1.20 cash for each of B's shares what value would be available for each group of shareholders?
=+The cost of equity capital for both firms is 12 per cent. B is expected to produce a growth in dividends of 5 per cent per annum to infinity with its current strategy and management. However if A
=+5ª Consider the following companies:A REarnings per share (recent)50g 10p Dividends per share (recent)2.5g 5p Number of shares Sm 3m Share price£9.00 75g
=+Explain the PER game and how High could continue to acquire firms, make no changes to underlying earnings and yet show a rising earnings per share trend.
=+d If High makes no changes to Low's operations and so earnings growth continues at its present rate what will the intrinsic value of a share in High be, assuming the current PERs reflect accurately
=+e If High was able to increase the rate of growth of Low's earnings to the same as High's and therefore place them on the same PER as High, what would High's share price move to?
=+b What is the bid premium being offered?
=+4*High ple has an historic PER of 22 and Low ple has an historic PER of 12. Both companies have 100 million shares in issue and produced earnings of £20m in the last financial year. High has
=+If shares are offered in such a way that Circle's shareholders would possess one-third of the merged entity, what is the value created for Box's shareholders?
=+b If a cash offer of £70m is accepted by Circle's shareholders what is the value cre-ated for Box's shareholders?
=+3* Box ple is considering the acquisition of Circle plc. The former is valued at £100m and the latter at £50m by the market. Economies of scale will result in savings of£2.5m annually in
=+2 Which of the following mergers is horizontal, vertical or conglomerate?a.Marks & Spencer and Next.b Northern Foods and Sainsbury's.e Philips and HMV.d P&O and Electrolux.e Ford and Microsoft.
=+c What would be the value of each of Large's shares after this merger?

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