Questions and Answers of Corporate Financial Management

=+Calculate the market price of the bonds on the assumption that yields to maturity rise by 200 basis points for all bonds.
=+d Now calculate the market price of the bonds on the assumption that yields to maturity fall by 200 basis points.
=+e Which bond price is the most volatile in circumstances of changing yields to maturity?
=+f Explain the liquidity-preference theory of the term structure of yields to maturity.
=+9 Find the current yield to maturity on government securities with maturities of one year, five years and ten years in the Financial Times. How has the yield curve changed since 2004 as shown in
=+12 In 2001 the term structure of interest rates for UK government securities was down-ward sloping and in 1996 it was upward sloping. Explain how these curves come about with reference to the
=+13 Iris plc borrows £50m at 9.5 per cent from Westlloyds bank for five years. What cash flows will the firm have to find if the interest and principal are paid in the fol-lowing ways?
=+All interest and capital is paid at the end of the period.
=+7 You are considering three alternative investments in bonds but would like to gain an impression of the extent of price volatility for each given alternative change in future interest rates. The
=+Assume that the next coupons are due in one year's time.
=+1 Imagine that the market yield to maturity for three-year bonds in a particular risk class is 12 per cent. You buy a bond in that risk class which offers an annual coupon of 10 per cent for the
=+a How much would you pay for the bond?
=+b If you paid £105 what yield to maturity would you obtain?
=+2 A £100 bond with two years to maturity and an annual coupon of 9 per cent is avail-able. (The next coupon is payable in one year.)If the market requires a yield to maturity of 9 per cent for a
=+b If the market price is £98, what yield to maturity does it offer?If the required yield to maturity on this type of bond changes to 7 per cent, what will the market price change to?
=+3 a If the government sold a 10-year gilt with a par value of £100 and an (annual)coupon of 9 per cent, what price can be charged if investors require a 9.5 per cent yield to maturity on such
=+b If yields to maturity on bonds of this risk class fall to 8.5 per cent, what could the bonds be sold for?
=+If it were sold for £105, what yield to maturity is the bond offering?
=+d What is the flat yield on this bond if it is selling at £105?
=+4* The price of a bond issued by C & M ple is 85.50 per cent of par value. The bond will pay an annual 8.5 per cent coupon until maturity (the next coupon will be paid in one year). The bond
=+a What will be the market price of the bond if yields to maturity for this risk class fall to 7.5 per cent?
=+b What will be the market price of the bond if yields to maturity for this risk class rise to 18 per cent?
=+5 A zero coupon bond with a par value of £100 matures in five years.
=+a What is the price of the bond if the yield to maturity is 5 per cent?
=+b What is the price of the bond if the yield to maturity is 10 per cent?
=+6 Bond 1 has an annual coupon rate of 6 per cent and Bond 2 has an annual coupon of 12 per cent. Both bonds mature in one year and have a par value of £100. If the yield to maturity on bonds of
=+b Interest only is paid for each of the years (at the year-ends); all principal is paid at the end.
=+e What do the terms cum-rights and ex-rights mean?
=+describe the scale of stock market activity around the world and explain the reasons for the widespread adoption of stock exchanges as one of the foci for a market-based economy;
=+15 What have been the main trends in UK share ownership over the past 30 years?
=+16 Explain the following: FTSE 100, FT All-Share, FTSE Fledgling.
=+1 "Stock markets are capitalist exploitative devices giving no benefit to ordinary people,' Write an essay countering this argument.
=+3 Many countries, for example Peru and Germany, are encouraging small investors to buy quoted shares. Why are they doing this?
=+4 Explain why firms obtain a share listing in countries other than their own.
=+5 Describe the trading systems of the London Stock Exchange and outline the advan-tages and disadvantages of the alternative methods of trading shares.
=+6 In the USA some firms have bypassed the formal stock exchanges and have sold their shares directly to investors over the internet (e.g. Spring Street Brewing). What advan-tages are there to this
=+What are the disadvantages, for firms and shareholders?
=+8 Describe the network of controls and restraints on the UK financial system to prevent fraud, abuse, negligence, etc. Do you regard this system as preferable to a statutorily controlled system?
=+9 Frame-up ple is considering a flotation on the Official List of the London Stock Exchange. The managing director has asked you to produce a 1,000-word report explaining the advantages of such a
=+10 Collasus ple is quoted on the London Stock Exchange. It is a large conglomerate with factories and sales operations in every continent. Why might Collasus wish to con-sider obtaining additional
=+11"The City is still far too clubby and gentlemanly. They are not rigorous enough in rooting out wrongdoing. What we need is an American type of system where the gov-ernment takes a lead in setting
=+1 Carry out a comparative study in your firm (or any quoted firm) using information provided by the Financial Times. Compare PERs, dividend yields, dividend cover and other key factors, with a peer
=+2 If your firm has made use of the stock market for any reason, put together a report to explain the benefits gained and some estimate of the costs of membership.Visit www.pearsoned.co.uk/arnold
=+14 What is CREST?
=+13 What is SEATS plus?
=+explain the functions of stock exchanges and the importance of an efficiently operated stock exchange;
=+give an account of the stock markets available to UK firms and describe alternative share trading systems;
=+demonstrate a grasp of the regulatory framework for the UK financial system;
=+be able to understand many of the financial terms expressed in the broadsheet newspapers (particularly the Financial Times);outline the UK corporate taxation system.
=+1 Name the largest (by volume of share turnover on the secondary market) share exchanges in the USA, Europe and Asia.
=+2 What is SEAQI?
=+3 What is a depositary receipt and why are they created?
=+4 Explain why finance has been 'globalised' over the last 20 years.
=+8 Explain the acronyms AIM, NASDAQ, SEAQ, OL, SETS, RIE and FSA.
=+10 Why has it been necessary to have more share exchanges than simply the Official List in the UK?
=+11 Why is a nominated adviser appointed to a firm wishing to join AIM?
=+12 Why might you be more cautious about investing in a company listed on OFEX, than a company on the Official List of the London Stock Exchange?
=+contrast equity finance with debt and preference shares;explain the admission requirements and process for joining the Official List of the London Stock Exchange and for the AIM;
=+describe the nature and practicalities of rights issues, scrip issues, vendor placings, open offers and warrants;
=+16 Why are placings subject to strict rules concerning the extent of price discount?
=+17 What adjustments need to be made to a balance sheet after a scrip issue?
=+18 Suggest circumstances when a firm may find the selling of warrants advantageous.
=+19 What do business angels bring to a firm?
=+20 What are the following: MBO, MBI, PTP, a venture capital fund, seedcorn?
=+1 (Examination level) Bluelamp ple has grown from a company with £10,000 turnover to one with a £17m turnover and £1.8m profit in the last five years. The existing owners have put all their
=+2 In what circumstances would you advise a company to float on the Alternative Investment Market (AIM) in preference to the Official List (OL)?
=+3 Checkers ple is considering a flotation on the Official List of the London Stock Exchange. Outline a timetable of events likely to be encountered which will assist management planning.
=+4 Describe the three costs associated with gaining a flotation on a stock exchange by selling shares to new shareholders.
=+6 Explain why failure to carry through a plan to raise capital by floating on the London Stock Exchange Official List might be highly disruptive to a firm.
=+7 There are a number of different methods of floating a company on the new issue market of the London Stock Exchange Official List (e.g. offer for sale). Describe these and comment on the ability
=+8" Mahogany ple has an ordinary share price of £3 and is quoted on the Alternative Investment Market. It intends to raise £20m through a one-for-three rights issue priced at £2.
=+a What will the ex-rights price be?
=+b How many old ordinary shares were in circulation prior to the rights issue?
=+c Patrick owns 9,000 shares and is unable to find the cash necessary to buy the rights shares. Reassure Patrick that he will not lose value. How much might he receive from the company?
=+15 What are, and why do the UK authorities insist upon, pre-emption rights?
=+14 List the differences between a flotation on AIM and the OL.
=+give an account of the options open to an unquoted firm wishing to raise external equity finance;
=+explain why some firms become disillusioned with quotation, and present balanced arguments describing the pros and cons of quotation.
=+What is equity capital? Explain the advantages to the firm of raising capital this way.
=+What are the disadvantages?
=+2 Distinguish between authorised and issued share capital.
=+3 What is the par value of a share, and what is the share premium?
=+4 Are all ples quoted? Describe both terms,
=+7 Why are non-voting shares disliked by the City investing institutions?
=+9 Outline the contents of a prospectus in a new issue on the Official List.
=+10 How might the working lives of directors change as a result of their company gaining a quotation?
=+11 What does a sponsor have to do to help a company float?
=+12 Describe the role of each of the institutions and professional organisations that assist a company in floating on the Official List.
=+13 What are an offer for sale by tender and an introduction of a new issue? Which is the cheaper method of flotation?
=+d What is the value of a right on one old share?
=+e £10m of the capital plus annual interest is paid on each anniversary date.
=+5 What are the main determinants of the extent of trade credit granted?
=+Which offer should the firm accept?
=+2* Snowhite plc has taken delivery of 50,000 units of Dwarf moulds for use in its garden ornament business. The supplier has sent an invoice which states the following:£50,000 is payable if the
=+Snowhite has an unused overdraft facility in place, on which interest is payable at 12 per cent annual percentage rate on the daily outstanding balance. If Snowhite paid after 10 days the overdraft
=+a Calculate whether to pay on the 30th day or on the 10th day, on the basis of the information provided.
=+b Despite the 30-day credit limit on the contract Snowhite is aware that it is quite normal in this industry to pay on the 60th day without incurring a penalty legally, financially or in terms of
=+3 (Examination level) Gordons ple has an annual turnover of f3m and a pre-tax profit of £400,000. It is not quoted on a stock exchange and the family which own all the shares have no intention of
=+You, as the recently hired finance director, have been in contact with some financial institutions. The Matey hire purchase company is willing to supply the £1m of ad-ditional equipment the firm
=+Required Write a report for the board of directors explaining the nature of the four forms of finance which may be used to purchase the new equipment: hire purchase, leasing, bank term loan and

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