Questions and Answers of Corporate Financial Management

=+b What is the total value creation from each if you assume profit numbers equate to cash flow numbers?
=+e Display a value-creation profile chart and suggest possible action.
=+2* Apply shareholder value analysis to an all-equity firm with the following Rappaport value drivers, assuming that the last reported annual sales were £25m.Sales growth rate 13%Operating profit
=+Marketable securities amount to £5m and depreciation can be taken to be equal to the investment needed to replace worn-out equipment.
=+3* Regarding the answer obtained in Question 2 as the 'base-case' strategy, make a judge-ment on the best strategic option given the following:- If the firm were liquidated the operating assets
=+If the firm separated its A division from its B division then A could be sold for£10m and the B division would have the following Rappaport value drivers:Sales growth rate 15%Operating profit
=+The B division had sales in the last year of £15m.If both divisions are retained and a new product differentiation strategy is attempted then the following Rappaport value drivers will apply:Sales
=+Conduct sensitivity analysis on the shareholder value analysis of Question 2, changing the required rate of return to 14 per cent and 16 per cent, and changing the planning horizon to Year 5 and
=+b Discuss the advantages and disadvantages of using shareholder value analysis.
=+5 Last year Tops ple (a firm financed entirely by equity) produced an accounting operat-ing profit of £5m. Its equity cost of capital is 14 per cent and the firm has £50m of capital.
=+What was the economic profit?
=+6 Buit ple is trying to estimate its value under the current strategy. The managerial team have forecast the following profits for the next five years:Year 12 34 5Em Em Em Forecast profit 12 14 15
=+Depreciation of fixed capital items in each of the first two years is £2m. In each of the next three years it is £3m. This has been deducted before arriving at the profit figures shown above. In
=+The planning horizon is four years. Additional working capital will be needed in each of the next four years. This will be £1m in year 1, £1.2m in year 2, £1.5m in year 3 and £1.8m in year 4.
=+The company is partially financed by debt - it owes £20m - and partially by equity capital. The required rate of return (WACC) is 10 per cent.The forecast profit figures include a deduction for
=+The company also owns a number of empty factories that are not required for busi-ness operations. The current market value of these is £16m.Required aCalculate the future cash flows for the
=+b Calculate corporate value and shareholder value.
=+7 Mythier plc, in its first year, produced profits after deduction of tax but before deduc-tion of interest of £1m. The amount invested by debt holders was £4m. Equity holders also invested £4m.
=+b Calculate economic profit using the equity approach.
=+Describe the advantages of using economic profit in the modern corporation.
=+d Explain the difficulties with economic profit.
=+8 Explain and contrast economic profit and shareholder value analysis.
=+Conduct a value-based analysis and write a report for a company you know well.Show the current position and your recommendations for change. Include in the analy-sis value-creation profile charts,
=+advantage (value drivers), qualitative evaluation of strategies, cash flow analysis, share-holder value analysis and EP.
=+2 Compare the metrics total shareholder return (TSR) and wealth added index (WAI).
=+4 Outline the market to book ratio (MBR) and state why it is superior to the MVA for some purposes.
=+5 Compare the value metrics market value added (MVA) and excess return (ER).
=+1 a Tear plc has not paid a dividend for 20 years. The current share price is 580p and the current index level is 3,100. Calculate total shareholder returns for the past three years, the past five
=+Comment on the problems of total shareholders' returns as a metric for judging managerial performance.
=+Calculate the wealth added index for ten and five years for Tear ple given the fol-lowing assumptions:
=+. The required rate of return on shares of the same risk class as Tear ple, over both ten and five years, was 9 per cent per year.
=+The company had 10 million shares in issue throughout the entire period.d
=+Discuss the advantages of the wealth added index compared with the total share-holder return. What are the difficulties in the practical use of the wealth added index?
=+2 Sity ple has paid out all earnings as dividends since it was founded with £15m of equity finance 25 years ago. Today its shares are valued on the stock market at £90m and its long-term debt has
=+How much market value added (MVA) has Sity produced?b
=+What is Sity's market to book ratio (MBR)?
=+Given that another company, Pity plc, was founded with £15m of equity capital five years ago and has paid out all earnings since its foundation and is now worth(equity and debt) £110m (£90m
=+d Calculate the excess return (ER) for both Sity and Pity given that the required rate of return for Sity is 8 per cent per year and the required rate of return is 10 per cent per year for Pity.
=+Discuss the advantages and disadvantages in using the MVA and ER to judge man-agerial performance.
=+Using data on a company you know well try to calculate the TSR, WAI, MVA, ER and MBR. Point out the difficult judgements you have had to make to calculate these figures.
=+calculate and explain the cost of debt capital, both before and after tax considerations;
=+describe the difficulties in estimating the equity cost of capital and explain
=+the key elements that require informed judgement;
=+calculate the weighted average cost of capital (WACC) for a company and
=+explain the meaning of the number produced;
=+describe the evidence concerning how UK companies actually calculate the WACC;
=+describe the main roles of a treasury department and the key concerns of managers when dealing with working capital;
=+comment on the factors influencing the balance of the different types of debt in terms of maturity, currency and interest rates;
=+show awareness of the importance of the relationship between the firm and the financial community;
=+demonstrate how the treasurer might reduce risk for the firm, perhaps
=+through the use of derivative products;
=+understand the working capital cycle, the cash conversion cycle and an inventory model.
=+1 Why do firms hold cash?
=+2 Why do firms need to make short-term financial investments?
=+3 Explain what is meant by liquidity, event and valuation risk.
=+4 What are the strengths and weaknesses of Baumol's cash management model?
=+5 Describe the advantages and disadvantages of retained earnings as a source of finance.
=+7 What are the main areas of risk a treasurer might help to manage?
=+8 What are relationship banking and transactional banking?
=+9 Describe the working capital cycle and the cash-conversion cycle.
=+10 What is overtrading?
=+11 Why do insurance companies exist?
=+12 What is an 'aggressive' working capital policy?
=+13 What is the 'float' in cash management?
=+14 What is a certificate of deposit?
=+15 What does it mean to make 'the treasury a profit centre'?
=+16 What are the main areas of 'control' of cash?
=+17 What is a cash budget?
=+18 What is the economic order quantity?
=+Also discuss ways of reducing the 'float' of a company.
=+2 As the treasurer of Stokes ple you have been asked to write a report putting forward ideas for the use of temporarily surplus cash. These funds will be available for varying periods - from one
=+Describe the main considerations or trade-offs for short-term cash management.Choose any four of the potential investment instruments, describe them and outline their advantages and disadvantages.
=+3* Rounded plc, a new retail business, has projected sales as follows:Em Jan 1.3 May 2.0 Sept.Feb.1.5 20 June 2.2 Oct.March 1.8 1.6 July 2.3 April Nov.1.9 1.9 Aug.2.0 Dec.3.0
=+One-third of sales are for cash, one-third is received one month after sales, and one-third is received two months after sale. The cash balance at the beginning of January is £500,000.
=+A major investment in new shops will cost f2m in cash in May. Stock costs one-half of sales and is purchased and paid for in the same month it is sold.Labour and other costs amount to £300,000 per
=+b Recommend action to be taken based on these cash balances,
=+4 Bluebond uses 300,000 units of raw material per year. It costs £200 to process and receive delivery of this stock regardless of the size of order. It also costs £10 per year to hold a unit for
=+ How many orders will be made per year and what is the total inventory cost of this raw material?
=+5 Blackwide uses 10,000 items of stock per year. It costs £7 to hold an item of stock for a year and the reorder costs are £50 regardless of quantity.a Find the economic order quantity in a
=+b Determine the total inventory cost for this item and the number of orders per year.
=+c If there was a certain delay in delivery of this item from the time of order of one week, at what level will stock be reordered?
=+d If the delay between order and delivery can vary from one week to two weeks
=+what is the maximum inventory holding if no stock-outs are to occur?
=+e What other factors might need to be allowed for in the real world of business?
=+6* Numerical example of treasury investment:As the treasurer of a firm you anticipate the following cash position which will require either short-term borrowing or investment:Cash flow forecast for
=+Describe how you would manage the firm's money over this 11-day period.What are the risks inherent in your plan of action?
=+7 (Examination level) You have been asked to prepare a cash budget for Whitborrow ple for the next three months, October, November and December. The managers are concerned that they may not have
=+There is a gross profit margin of 40 per cent on sales. All costs (materials, labour and other) are paid for on receipt. Only 20 per cent of customer sales are expected to be paid for in the month
=+b Recommend action that could be taken to improve the working capital position of Whitborrow.
=+8" Silk plc invests surplus cash in a range of money-market securities which earn a rate of return of 8 per cent per annum. It tries to hold the smallest cash balances possible while permitting the
=+9 It costs £20 in administration expenses and fees every time Davy Ltd pays funds into the bank to reduce its large overdraft on which it is charged 10 per cent annual per-centage rate (APR). The
=+10 Captain ple buys 100,000 widgets per year at a cost of £15 per widget for use in its production process. The cost of holding one widget in stock, in terms of interest, security, insurance,
=+b What buffer stock would you suggest if the firm is determined never to have a stock-out and the supplier of Widgets sometimes delivers one week and some-times three weeks after an order?
=+11 Christopher Purser said that Glynwed ple's treasury department had as one of its responsibilities to 'Manage the group's cash and currency flows so as to:-minimise interest paid;maximise
=+12 'I run this business the way I want to. Shareholders and bankers are told once a year how we performed but I will not give them details or meet regularly with them. We have a business to run.
=+13 (Examination level) Reraser ple has grown fast and has recently appointed you as its corporate treasurer. You have been asked by the board to write a report pointing out the ways in which the
=+14 Explain why firms sometimes have temporarily surplus funds. What considerations are relevant when choosing the type of financial instrument to be purchased with these funds?
=+15 Calumnor ple's board of directors is concerned that it may have an imbalance in its debt profile. You have been asked to write a report pointing out the main considera-tions in achieving the
=+16 (Examination level) "The treasurer sits up there in his office, earning a salary three times my level, playing with his computer all day. At least I produce something useful for the firm' - a
=+17 Describe the motives for holding cash. Why is it useful for a firm to draw up cash budgets?

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