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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

20 Stock Splits and Stock Dividends Eurasion Natural Resources Corporation currently has 2.4 million shares outstanding that sell for £5.16 per share. Assuming no market imperfections or tax effects
21 Regular Dividends The balance sheet for Severn Trent plc is shown here in market value terms. There are 2.4 billion shares outstanding.Market Value Balance Sheet (£m)Cash 5,045 Equity 4,022
22 Share Repurchase In the previous problem, suppose Severn Trent plc has announced it is going to repurchase £1 billion worth of equity. What effect will this transaction have on the equity of the
23 Stock Dividends The market value balance sheet for KL Air is shown here. KL Air has declared a 20 per cent stock dividend. The equity goes ex dividend tomorrow (the chronology for a stock dividend
25 Stock Splits In the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 70 cents per share cash dividend on the new (post-split) shares represents an
26 Residual Dividend Policy Hillshire plc uses a residual dividend policy. (see problem 11). A debt–equity ratio of 0.60 is considered optimal. Earnings for the period just ended were £524,292 and
27 Residual Dividend Policy Worthington AG has declared an annual dividend of 1.50 Swiss francs(SFr) per share. For the year just ended, earnings were SFr14 per share.(a) What is Worthington’s
28 Residual Dividend Policy Red Zeppelin plc follows a strict residual dividend policy (see problem 11).Its debt–equity ratio is 3.(a) If earnings for the year are £180,000, what is the maximum
29 Residual Dividend Policy Preti Rock SA predicts that earnings in the coming year will be €56 million.There are 12 million shares, and PR maintains a debt–equity ratio of 2.(a) Calculate the
30 Dividends and Share Price Mann Company belongs to a risk class for which the appropriate discount rate is 10 per cent. Mann currently has 100,000 outstanding shares selling at £100 each. The firm
31 Homemade Dividends You own 2,000 shares of equity in Avondale Property plc. You will receive a £0.25 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of
32 Homemade Dividends In the previous problem, suppose you want only £400 total in dividends the first year. What will your homemade dividend be in two years?
34 Dividends and Firm Value The net income of Novis AS is 32,000 kroner (DKr). The company has 10,000 outstanding shares and a 100 per cent payout policy. The expected value of the firm one year from
35 Dividend Policy Newcastle Autos plc has a current period cash flow of £4.2 million and pays no dividends.The present value of the company’s future cash flows is £72 million. The company is
36 Dividend Smoothing Sharpe SA has just paid a dividend of €1.25 per share of equity. Its target payout ratio is 40 per cent. The company expects to have an earnings per share of €4.50 one year
38 Dividends and Taxes As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the
39 Signalling through Corporate Payout Policy Miller and Rock (1985) put forward a signalling model of corporate payout policy. Critically evaluate this model, with specific reference to the
1 You have been asked by a client to forecast the dividend per share of Clouds plc over the next three years.From initial investigation, you find out that the company paid a dividend of £1.00 per
2 Review the reasons why corporations issue dividends when it appears from a tax perspective suboptimal to do so. (30 marks)
3 In recent years, share repurchases have become more common than cash dividends. Explain why you think this is so, using research you have read to support your answer. (30 marks)
2 Louis-Lucien believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Louis-Lucien’s proposals affect the
4 Another option discussed by Georges, Louis-Lucien and Katherine would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?
5 One way to value a share of equity is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minusb, where b is the ‘retention’ or
6 Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or partnership?
50 Use the annual financial statements for three companies in your country to find the dividend payout ratio for each firm for the past three years. Why would these companies pay out a different
51 Dividend policy in itself is not affected by accounting standards, however the presentation of dividends is affected by IAS 1 Presentation of Financial Statements, IAS 27 Consolidated and Separate
1 IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments:Disclosure are exceptionally important for options. Since the potential exposure to losses from options
1 How many different volatilities would you expect to see for the equity?You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design,
2 Unfortunately, solving for the implied standard deviation is not as easy as Mal suggests. In fact, there is no direct solution for the standard deviation of the equity even if we have all other
3 Are all of the implied volatilities for the options the same? (Hint: No.) What are the possible reasons that can cause different volatilities for these options?You are currently working for
4 After you discuss the importance of volatility on option prices, your boss mentions that he has heard of the FTSE 100 Volatility Index (VFTSE) on Euronext. What is the VFTSE and what does it
5 Look for current option quotes for the FTSE 100 Volatility Index on Euronext. To find these, search on the Euronext website for the ISIN: QS0011052162. What does the implied volatility of a VFTSE
1 Describe and explain the type of option being sold by the developer. (15 marks)A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife centre. The safari
2 Describe and explain the position held by the potential lodge owner as an option. (15 marks)A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife centre. The
3 Discuss the risks associated with this transaction to both the developer and the lodge owner. (15 marks)A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife
4 Suppose we purchased a right on one of the lodges during the inducement period, and it has just been discovered that a very rare type of lion has been discovered close to the lodge. Explain what
5 Suppose that the developer was selling two contracts. One contract permits you to purchase a lodge any time during the six-month period and the other allows you to purchase the lodge only at the
6 To reduce your cash outflows shortly before it became public knowledge that the rare lions live near the lodge, you sign a contract with a colleague. This contract gives you the right to sell the
7 Describe the potential obligations associated with the options involving the developer and the two friends.Use diagrams to illustrate your answer. (10 marks)A developer has just acquired 60 acres
37 Put Delta In the chapter, we noted that the delta for a put option is N(d1 ) − 1. Is this the same thing as– N(– d1)? (Hint: Yes, but why?)38 Black–Scholes Put Pricing Model Use the
39 Black–Scholes An equity is currently priced at £50. The share will never pay a dividend. The risk-free rate is 12 per cent per year, compounded continuously, and the standard deviation of the
34 Two-state Option Pricing and Corporate Valuation Strudler Property plc, a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value
35 Black–Scholes and Dividends In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black–Scholes option pricing model with dividends
36 Put–Call Parity and Dividends The put–call parity condition is altered when dividends are paid.The dividend adjusted put–call parity formula is:S ×  e −dt  + P = E ×  e −Rt
1 Options Many laypeople find the whole concept of options difficult to understand. Use a non-financial example to explain how options work and why they are so important for flexible decision-making.
2 American versus European Options What is the difference between an American and European option?Is an American call option on a dividend-paying stock always worth at least as much as its intrinsic
3 American Versus European Options Why is it that an American option is always worth the same as a European option? If it were not, what strategy could an arbitrageur use to profit?
4 Options and Asset Values Suppose that UK government bond yields unexpectedly rise. Ceteris paribus, what would happen to the value of call options and put options?
5 Option Quotes Normally the settlement price falls as the strike price increases for call options. Conversely, the settlement price generally increases as the strike price gets higher for put
6 Option Combinations Why would a corporation wish to combine put and call options on a commodity?Provide an example of a case where this might happen.
7 Valuing Options Review the factors that affect the value of call and put options.
8 Option Pricing Why can’t you just value an option using discounted cash flows, as in net present value?
9 The Greeks What are the Greeks? Why are they important to a corporation?
10 Shares and Bonds as Options Show how a share of equity can be viewed as an option. Why is this perspective helpful?
11 Options and Corporate Decisions In many countries, governments have encouraged bank mergers to reduce their risk. Use option analysis to show why this may be bad news for the bank’s
12 Option Pricing The Pirelli & C. SpA share price is €8.895. A call option with an exercise price of €9 sells for €0.35 and a put option with the same exercise price sells for €0.65. Does
13 Two-state Option Pricing Model T-bills currently yield 2.1 per cent and the Man Group plc share price is £0.97. There is no possibility that the equity will be worth less than £0.50 per share in
14 Understanding Option Quotes Use the option quote information from Euronext Liffe shown here for Xstrata plc to answer the questions that follow. The equity is selling for £11.025.Calls Puts
15 Calculating Payoffs Use the option quote information on Unilever NV from Euronext below to answer the questions that follow. Assume that 100 shares make 1 contract.CODES AND CLASSIFICATION Code UN
16 Two-state Option Pricing Model The share price of ABC plc will be either £2 or £1.5 at the end of the year. Call options are available with one year to expiration. UK government bond yields are
17 Two-state Option Pricing Model The price of National Bank of Greece shares will be either €1.74 or€1.43 at the end of the year. Call options are available with one year to expiration. T-bills
18 Put–Call Parity BP plc shares are currently selling for £4.29 per share. A put option with an exercise price of £4.40 sells for £0.25 and expires in three months. If the risk-free rate of
19 Put–Call Parity Alcatel-Lucent has a put option and a call option with an exercise price of €1 and three months to expiration, sell for €0.28 and €0.11, respectively. If the risk-free rate
22 Black–Scholes and Asset Value In the previous problem, suppose you wanted the option to sell the mine to the buyer in one year. Assuming all the facts are the same, describe the transaction that
24 Black–Scholes Xstrata plc is currently priced at £10.52. A call option with an expiration of six months has an exercise price of £9.00. The risk-free rate is 3 per cent per year, compounded
25 Equity as an Option Shire plc has a zero coupon bond issue outstanding with £12 billion face value that matures in five years. The current market value of the firm’s assets is £20 billion. The
26 Equity as an Option and NPV Suppose Shire plc (see problem 25) is considering two mutually exclusive investments. Project A has an NPV of £700 million, and project B has an NPV of £1.2 billion.
27 Mergers and Equity as an Option Suppose Shire plc (problem 25) decides to reorient its operations and, as a result, the return on assets now has a standard deviation of 30 per cent per year.(a)
28 Equity as an Option and NPV A company has a single zero coupon bond outstanding that matures in 10 years with a face value of £30 million. The current value of the company’s assets is £22
29 Two-state Option Pricing Model Ken is interested in buying a European call option written on Southeastern Airlines plc, a non-dividend-paying equity, with a strike price of £110 and one year
30 Two-state Option Pricing Model Maverick Manufacturing plc must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise
31 Black–Scholes and Collar Cost An investor is said to take a position in a ‘collar’ if she buys the asset, buys an out-of-the-money put option on the asset and sells an out-of-the-money call
32 Debt Valuation and Time to Maturity McLemore Industries has a zero coupon bond issue that matures in two years with a face value of £30,000. The current value of the company’s assets is
3 The value of an option depends on five factors:(a) The price of the underlying asset(b) The exercise price(c) The expiration date(d) The variability of the underlying asset(e) The interest rate on
5 Much of corporate financial theory can be presented in terms of options. In this chapter, we pointed out that:(a) Equity can be represented as a call option on the firm.(b) Shareholders enhance the
1 Executive Share Options Why do companies issue options to executives if they cost the company more than they are worth to the executive? Why not just give cash and split the difference? Wouldn’t
2 Real Options What are the two options that many businesses have? Why does a traditional NPV analysis tend to underestimate the value of an investment opportunity? Explain.
3 Valuing a Start-up Given that anything is possible in the future, why can’t an entrepreneur who is seeking funding choose assumptions that make a start-up look good when it isn’t? Is this more
4 The Binomial Model Why is the binomial model more appropriate for real option analysis than Black–Scholes?
5 Executive Stock Options Do you think that executive stock options motivate executives to act in the best interests of the company? Explain.REGULAR
6 Stock Option Exercises and Share Prices The stock price of ABC plc is currently at £30, and the company has 2 million shares outstanding. The company’s CEO exercises 200,000 stock options with a
8 Real Options Your company owns a vacant plot in a suburban area. What is the advantage of waiting to develop the plot?
9 Real Options Ventiora SpA has a disused warehouse it is holding until land prices increase before selling to potential buyers. In option terminology, what type of option(s) does the company have on
10 Real Options and Capital Budgeting Most companies use traditional capital budgeting techniques, such as payback period and net present value. Why do you think this is the case? How would you
12 Real Options How would the analysis of real options change if a company has competitors?
13 Employee Share Options Kevin Swinson is the finance director of Mountainbrook Trading plc.The board of directors has just granted Mr Swinson 30,000 at-the-money European call options on the
14 Employee Share Options Joseph-Benoit Suvee has just been named the new chief executive officer of BluBell Fitness NV. In addition to an annual salary of €400,000, his three-year contract states
15 Binomial Model Gasworks AG has been approached to sell up to 5 million litres of gasoline in three months at a price of €1.85 per litre. Gasoline is currently selling on the wholesale market at
16 Real Options Webber plc is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land on the outskirts of Leeds over the next
17 Real Options Eurocargoair is a British private air courier firm that has been given the option to purchase three new small jets at the price of £3 million per plane. The purchase agreement is
18 Real Options Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one
19 Real Options Sardano and Sons is a large, publicly held company that is considering leasing a warehouse.One of the company’s divisions specializes in manufacturing steel and this particular
20 Real Options Mouillez Pour L’été SA (MPLE) manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now the
21 Binomial Model There is an American put option on an equity that expires in two months. The share price is €13.20, and the standard deviation of the share price returns is 35 per cent. The
22 Real Options You are in discussions to purchase an option on an office building with a strike price of £47 million. The building is currently valued at £45 million. The option will allow you to
23 Overseas Oil Exploration Fan and Zhu (2010) propose a real options framework to value oil exploration projects in the presence of three sources of uncertainty: the overseas investment environment,
24 Downsizing and Shared Services With increased globalization, many firms have chosen to share services or facilities with another firm in different countries. An example is the joint venture by
25 Electrical Interconnectors In the electricity industry, interconnectors give the owner the option to transmit electricity to one of two locations. Show, using your own example, how real option
26 Research and Development You have recently been employed as a finance consultant to a growing company, R&D Industries, which consistently develops successful products. After a meeting with the
1 Your firm is considering a bid for a financially distressed football firm that is in administration.The administrators have said you must pay an exclusivity fee of £500,000 to develop the bid

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