Questions and Answers of Corporate Financial Management

=+5" The Snack company is considering buying £30,000 of new kitchen equipment through a hire purchase agreement stretching over 18 months. £10,000 is paid as a deposit and the hire purchase company
=+loan with a fixed interest rate of 10% p.a. (APR) and no arrangement fee. Any sur-plus cash can be deposited to earn 4% APR. The borrowing requirement for the forthcoming year is as follows:Month J
=+1 Ronsons ple, the jewellery retailer, has a highly seasonal business with peaks in rev- enue in December and June. One of Ronsons' banks has offered the firm a 200,000 overdraft with interest
=+16 For what type of firms are acceptance credits useful?
=+6 In assessing whether to grant trade credit to a customer what would you take into account and what information sources would you use?
=+7 Discuss the advantages and disadvantages of offering an early settlement discount on an invoice from the supplier's point of view.
=+8 What are the main features of a good debtor collection system?
=+10 Explain the difference between the flat rate of interest on a hire purchase agreement quoted by a sales representative and the annual percentage rate.
=+11 How does hire purchase differ from leasing?
=+12 Explain the terms 'operating lease' and 'finance lease',
=+13 How can lease finance be used to create off-balance-sheet debt? How are leases accounted for today?
=+14 What are the tax advantages of leasing an asset?
=+15 What is a bill of exchange and what does discounting a bill mean?
=+b Discuss the relative merits and drawbacks of the two forms of finance mentioned in the question.
=+The company's overdraft facility costs 14 per cent per annum.
=+The reduced collection effort will save £50,000 per annum on administration and bad debts will fall to 0.7 per cent of turnover.Required aShould the new credit terms be offered to customers?
=+b What are the main considerations you would give thought to in setting up a good credit management system?
=+13 What sources of information would you access to assess the creditworthiness of a cus-tomer?
=+What systems would you install to try to obtain prompt payment?
=+14 Explain some of the reasons for the growth in the hire purchase and leasing industry round the world over the past two decades.
=+15 Explain why a loss-making company is more likely to lease an asset than to buy it.
=+2 Investigate the debtor management policy of a firm with which you are familiar. Write
=+a report contrasting current practice with what you consider to be best practice.Recommend action.
=+It is estimated that 60 per cent of customers will accept this and pay on the 20th day, but 40 per cent will continue to pay, on average, on the 90th day.Sales are £10m per annum and bad debts are
=+12* (Examination level) Oxford Blues ple has standard trade terms requiring its cus-tomers to pay after 30 days. The average invoice is actually paid after 90 days. A junior executive has suggested
=+a b Suggest steps that Penguin could take to improve the balance sheet, profit and loss and cash flow position.
=+8 Write an essay with the title: 'Small firms find it more difficult to raise finance than larger firms'
=+9* (Examination level) A factoring company has offered a one-year agreement with Glub Ltd to both manage its debtors and advance 80 per cent of the value of all its invoices immediately a sale is
=+The annual sales on credit of Glub are £6m spread evenly through the year, and the average delay in payment from the invoice date is at present 80 days. The factoring
=+company is confident of reducing this delay to only 60 days and will pay the remain-ing 20 per cent of invoice value to Glub immediately on receipt from the customer.The charge for debtor
=+Glub will be able to save £80,000 during this year in administration costs if the factoring company takes on the debtor management. At the moment it finances its trade credit through an overdraft
=+Advise Glub on whether to enter into the agreement. Discuss the relative advantages and disadvantages of overdraft, factoring and term loan financing.
=+11 (Examination level) Extracted data from Penguin ple's last accounts are as follows:Em Annual sales 21 Profits before interest and tax 2Interest 0.5 Shareholder funds 5Long-term debt 4Debtors 2.5
=+A major supplier to Penguin offers a discount of 2 per cent on all future supplies if payment is made on the seventh day following delivery rather than the present 70th day. Monthly purchases from
=+3 Describe a circumstance in which an overdraft is preferable to a term loan from the borrower's point of view.
=+15 Convertibles are great because they offer a lower return than straight debt and we just dish out shares rather than having to find cash to redeem the bonds' - executive at Myopic plc. Comment on
=+a What is the conversion price?
=+b What is the conversion premium?
=+As the financial adviser to the board you have been asked to explain each of these forms of finance and point out the relative advantages and drawbacks. Do this in report form.
=+c What is the conversion value of the bond?
=+17 Explain the following terms and their relevance to debt-finance decision makers:Negative covenant.
=+b Conversion premium.Collateral.
=+d Grace periods.18
=+Outline the main advantages and disadvantages of fixed and floating interest rates from the borrowing company's perspective.
=+19 (Examination level) Flying High ple plans to expand rapidly over the next five years and is considering the following forms of finance to support that expansion.
=+a A five-year £10m floating-rate term loan from MidBare Bank plc at an initial annual interest of 9 per cent.
=+b A five-year Eurodollar bond fixed at 8 per cent with a nominal value of US$15m.
=+The Helpful leasing company is willing to buy the equipment and rent it to Gordons on a finance lease stretching over the four-year useful life of the equipment, with a nominal rent thereafter. The
=+2 Write a report for the senior management of a company you know well explaining your views on the wisdom of using some of the firm's assets in a sale and leaseback transaction.
=+1 Review the long-term debt instruments used by a company familiar to you. Consider the merits and drawbacks of these and explain alternative long-term debt strategies.
=+Explain what this executive means and suggest forms of long-term borrow-ing which have few constraints.
=+20 We avoid debt finance because of the unacceptable constraint placed on managerial actions.'
=+14 What factors should a firm consider when borrowing from a bank?
=+c A £10m convertible bond offering a yield to redemption of 6 per cent and a con-version premium of 15 per cent.
=+1 What are the essential differences between an overdraft and a term loan?
=+describe bills of exchange and bank bills and their uses.
=+consider the relative merits of hire purchase and leasing;
=+explain the different services offered by a factoring firm;
=+management and be able to analyse the early settlement discount offer;
=+show awareness of the central importance of trade credit and good debtor
=+describe, compare and contrast the bank overdraft and the bank term loan;
=+2 Investigate how systematic risk factors are taken into account when setting discount rates for projects of different risk levels in a firm you know well. Write a report detail-ing how this
=+1 Find out your firm's beta from published sources and calculate the rate of return expected from your firm's shares on the assumption that the CAPM holds.
=+11 'The arbitrage pricing theory has solved all the problems of estimating the relation-ship between risk and return.' Do you agree?
=+e Why might the outcome be significantly different from the expected return?
=+b If the risk-free rate of return is 6.5 per cent and the risk premium on shares over Treasury bills has been 5 per cent what is the expected return on this portfolio over the next year?
=+a What is the beta on this portfolio?
=+f The arbitrage pricing theory assumes unsystematic risk as a key input factor.10 Mr Gill has inherited the following portfolio:Share Share price No. of shares Beta ABC plc£1.20 20,000 0.80 DEF
=+e Investors expect compensation for risk factors other than beta such as macroeco-nomic changes.
=+d Beta has proved to be an excellent predictor of share returns over the past thirty years.
=+c The CAPM states that systematic risk is the only factor influencing returns in a diversified portfolio.
=+b The risk premium on the market portfolio of shares has always been 5 per cent.
=+a A £1,000 investment in the market portfolio combined with a f500 investment in the risk-free security will have a beta of 2.
=+9 True or false?
=+b Why doesn't the firm simply use its overall discount rate of 13 per cent for all project appraisal?
=+a Which projects should be accepted?
=+8 The risk-free rate of return is 7 per cent and the annual premium received on shares over Treasury bills has been 5 per cent. A firm is considering the following invest-ments (the CAPM
=+b Is the project attractive to those shareholders? Explain to the directors unfamiliar with the jargon of the CAPM the factors you are taking into account in your recommendation.
=+a Explain whether the directors should focus on beta or the standard deviation given that the shareholders are fully diversified.
=+7 The directors of Frane ple are considering a project with an expected return of 23 per cent, a beta coefficient of 1.4 and a standard deviation of 40 per cent. The risk-free rate of return is 10
=+6 Explain from first principles the CAPM and how it may be used in financial markets and within a firm for determining the discount used in project appraisal. Why might you have doubts about
=+b Share P has an expected return of 30 per cent and a beta of 1.7. What is likely to happen to the price and return on shares in P?Share Q has an expected return of 10 per cent and a beta of 0.8.
=+What is the riskless rate of return and the risk premium on the market index port-folio?
=+5 Shares in M and N lie on the security market line.Share M Share N Expected return 18%22%Beta 11.5[assume the CAPM holds)a
=+4 The risk-free return is 9 per cent, Company J has a beta of 1.5 and an expected return of 20 per cent. Calculate the risk premium for the share index over the risk-free rate assuming J is on the
=+3 Share A has a beta of 2, share B has a beta of 0.5 and C a beta of 1. The riskless rate of interest is 7 per cent and the risk premium for the market index has been 5 per cent. Calculate the
=+2 'Last year I bought some shares. The returns have not been as predicted by the CAPM.' Is this sufficient evidence to reject the CAPM?
=+Calculate the return expected on shares in X assuming the CAPM applies.
=+1 Company X has a beta value of 1.3, the risk-free rate of return is 8 per cent and the historie risk premium for shares over the risk-free rate of return has been 5 per cent.
=+12 In 2000, 2001 and 2002 the return on UK shares was less than the return on UK Government bonds. Why don't we take the most recent returns for r. - r, in the CAPM rather than the long-term
=+11 Discuss the potential problems with the implementation of the arbitrage pricing theory
=+10 List the theoretical and practical problems of the CAPM.
=+9 Is the firm's existing cost of capital suitable for all future projects? If not, why not?
=+8 What are the fundamental differences between the CAPM and the APT?
=+7 Describe how the characteristic line is established.
=+6 What influences the beta level for a particular share?
=+5 What problems are caused to the usefulness of the CAPM if betas are not stable over time?
=+ What mechanism will cause the share return to move towards the security market line?
=+4 If a share lies under the security market line is it over- or under-valued by the market(assuming the CAPM to be correct)?
=+3 State the equation for the security market line.

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