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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

1 Leon Dung SA, a large fertilizer distributor based in the north of Spain, is planning to speed up collections from its customers located in the Castille y Leon region. A Vallidolid-area bank will
2 Based on the Miller–Orr model, describe what will happen to the lower limit, the upper limit and the spread(the distance between the two) if the variation in net cash flow grows. Give an
3 Given an annual interest rate of 4 per cent, a fixed order cost of €10 and total cash needed of €5,000, calculate the target cash balance using the Baumol model. How do you interpret your
4 Dagmar Bamberger, the president of Schwarzwald AG, has been exploring ways of improving the company’s financial performance. Schwarzwald manufactures and sells office equipment to retailers. The
What is Corporate Finance? What are the main elements of corporate finance? How might these elements relate to typical family life?
Introduction to Corporate Finance Which of the following is not a core element of corporate finance?(a) The investment decision(b) The equity decision(c) The financing decision(d) Short-term capital
Goal of Financial Management Explain the assumption behind the statement: ‘The goal of financial management is to maximize the current share price.’ Why isn’t the goal to maximize the future
Financial Markets Why do you think there are so many different types of financial markets? Would it not make sense to have just one global stock exchange where every equity was traded? What are the
Financial Markets Explain the difference between primary and secondary markets. Why should companies be interested in secondary markets if they don’t raise money directly for transactions that take
Corporate Finance in Action The section highlighting Alphabet as a case study is special in many ways because of the firm’s meteoric success. Extend the case study on Alphabet by looking at the
Balance Sheet Equation Passenger plc has €619 million in current assets and €1,403 million in total assets. It has €338 million in current liabilities and €1,253 million in total liabilities.
Capital Structure In the previous question, Passenger plc announced that it plans to increase its noncurrent assets by €100 million. If the company wishes to maintain its ratio of total liabilities
Accounting and Cash Flows You work for a private airport that has just purchased a new radar system from the UK for £3.5 billion. You have paid £100 million up front with the rest to be paid in
Timing of Cash Flows Your company has just entered into a 12-month contract to supply mobile telephones to all its staff. You have been given two payment options. The first is to pay £50,000 every
Risk of Cash Flows You are assessing the viability of two projects. Project A has a 25 per cent chance of losing €1,000,000, a 50 per cent chance of breaking even and a 25 per cent chance of making
Corporate Goals Explain what is meant by the triple bottom line. What are the main issues financial managers must consider when pursuing a triple bottom line perspective?
Triple Bottom Line Do you consider the triple bottom line to be important to a firm’s management?Explain.
Financing Goals As a firm progresses throughout its life cycle it will typically move from seeking investment from private sources towards raising money on the capital markets. Explain why this is
Short-term Financing Goals In 2019, it was reported that Apple had more than $250 billion in cash. This was more than the whole GDP of Finland, which is the market value of all goods and services
Financial Management Goals You have read the first chapter of this textbook and have taken over a company that you now discover is losing £100,000 a week. At the rate things are going, the company
Financial Management Goals Explain why shareholder wealth maximization is consistent with the triple bottom line concept. Are societal and environmental issues a necessary function of business?
Ethical and Non-ethical Funds You have just joined a graduate scheme in a fund management company, and your manager tells you that ethical funds do not significantly outperform non-ethical funds,
Financial Management Goals Many ‘experts’ suggest that maximizing profit should be the main financial goal of a corporation. Is this a correct view? Explain.
Financial Management Goals You have been manager of a small company for 20 years and have become great friends with your employees. In the last month, foreign owners have bought out the company’s
Goals of the Firm Your company’s new owners suggest the following changes to maximize the value of the firm. Write a brief report responding to each point in turn.(a) Add a cost of living
Dealer versus Agency Markets Explain the difference between dealer and agency markets. Why do you think both types of market exist? Is there one type of market that is the best? Explain.
Statement of Financial Position If a firm is to cut costs as a result of falling revenues, how would this appear in the statement of financial position? Explain.
Dual-class Shares The multinational media company News Corporation has a dual-class share structure.Why might the company do this? Are there any drawbacks?
Balance Sheet Equation You have the following information for the German engineering firm, thyssenkrupp AG. All figures are in millions of euros (€).2018 2017 Non-current assets 14,118 14,501
Balance Sheet Assume that thyssenkrupp AG increased its non-current assets by €1 billion in 2019 and at the same time reduced its current assets by €500 million. Review the ways in which
Statement of Financial Position Assume that, in 2019, thyssenkrupp purchased a new automation technology for €500 million. It paid this on credit and won’t actually be due to pay for the
Statement of Financial Position Assume that, instead of fully financing the expansion with debt, the managers of thyssenkrupp say they wish to maintain the pre-transaction ratio of non-current
Financial Market Regulators The UK’s financial markets regulator states that its objectives are to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal, and
Balance Sheet Model of the Firm The layout of financial accounts is rarely the same across companies and, sometimes, it can be difficult to establish a simple picture of a firm’s balance sheet. The
Goals of a Financial Manager In 2012, the Argentinian government nationalized YPF, which is a subsidiary of Repsol, the Spanish oil giant. YPF was integral to the operations of Repsol. The firm was
Stock Exchanges The UK has a hybrid stock exchange where the largest companies are traded on an electronic order book and the smallest firms are traded through a competitive dealer market. Do you
Life Cycle of Firms Choose any company from your country and develop a chronology of the firm’s life cycle, from the business start-up, through initial expansion, to stock exchange listing, and
As a financial manager, what will be your main activities in her new company? (12 marks)
What will be your first priority? Explain. (12 marks)
Will the company need to invest money? Explain. (12 marks)
Will the company need financing? Explain. (12 marks)
How will the company raise financing? Is it sensible to list the company on the stock market or issue debt?What about bank loans? (12 marks)
What are the benefits of holding cash? (12 marks)
What should be the goal of the company? (12 marks)
The artist has said to you that she does not wish to run a company that does not contribute to society. She asks if it is possible to have corporate objectives that are broader than just maximizing
For each firm, look at its statement of financial position and record the following:(a) Non-current assets(b) Current assets(c) Current liabilities(d) Non-current liabilities.Construct the balance
Find the share price of each firm. What does the share price history tell you about each company?A skill any financial manager must have is to be able to find and understand financial information.
Read the news for each company. What does the news tell you about the fortunes of each company?A skill any financial manager must have is to be able to find and understand financial information.
Combining all the information, which company do you think is the best investment? Explain.A skill any financial manager must have is to be able to find and understand financial information. Choose
Corporate finance has three main areas of concern:(a) Capital budgeting: What long-term investments should the firm take?(b) Capital structure: Where will the firm get the long-term financing to pay
The Norwegian firm Fjell ASA is considering expanding operations overseas, and is evaluating the Netherlands and South Africa as possible sites. The Netherlands is viewed as relatively safe, whereas
The Italian firm Montana SpA is attempting to choose between two proposals for new products. Both projects will provide additional cash flows over four years and will initially cost €10,000. The
Every company that needs cash must raise it from somewhere. In 2018, Siemens received a total of€4.2 billion by issuing new equity of its subsidiary Siemens Healthineers on the German stock
The Berkeley Group is a large British building company focusing on new housing estate developments.The assets of Berkeley Group include not only buildings and property (tangible assets), but also the
Hedging Strategies If a firm is selling futures contracts on lumber as a hedging strategy, what must be true about the firm’s exposure to lumber prices?
Hedging Commodities Bubbling Crude Corporation, a large Texas oil producer, would like to hedge against adverse movements in the price of oil because this is the firm’s primary source of revenue.
Sources of Risk A company produces an energy-intensive product and uses natural gas as the energy source. The competition primarily uses oil. Explain why this company is exposed to fluctuations in
Hedging Commodities If a textile manufacturer wanted to hedge against adverse movements in cotton prices, it could buy cotton futures contracts or buy call options on cotton futures contracts. What
Option Explain why a put option on a bond is conceptually the same as a call option on interest rates.
Transaction versus Economic Exposure What is the difference between transactions and economic exposure? Which can be hedged more easily? Why?
Hedging Exchange Rate Risk If a U.S. company exports its goods to Japan, how would it use a futures contract on Japanese yen to hedge its exchange rate risk?Would it buy or sell yen futures? Does the
Futures Quotes Refer to Table 25.2 in the text to answer this question. Suppose you purchase a March 2012 cocoa futures contract on November 22, 2011, at the last price of the day. What will your
Put and Call Payoffs Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $95 per barrel. She simultaneously sells a put option on 50,000 barrels of oil
Cash Management What options are available to a firm if it believes it has too much cash? How about too little?
Agency Issues Are stockholders and creditors likely to agree on how much cash a firm should keep on hand?
Short-Term Investments Why is a preferred stock with a dividend tied to short-term interest rates an attractive short-term investment for corporations with excess cash?
Agency Issues It is sometimes argued that excess cash held by a firm can aggravate agency problems (discussed in Chapter 1) and, more generally, reduce incentives for shareholder wealth maximization.
Calculating Float In a typical month, the Jeremy Corporation receives 140 checks totaling $124,000. These are delayed four days on average. What is the average daily float?
International Capital Budgeting Suppose it is your task to evaluate two different investments in new subsidiaries for your company, one in your own country and the other in a foreign country. You
International Capital Budgeting An investment in a foreign subsidiary is estimated to have a positive NPV after the discount rate used in the calculations is adjusted for political risk and any
International Borrowing If a U.S. firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in the United States? How would you overcome them?
International Investment If financial markets are perfectly competitive and the Eurodollar rate is above that offered in the U.S. loan market, you would immediately want to borrow money in the United
Using Exchange Rates Take a look back at Figure 31.1 to answer the following questions:a. If you have $100, how many euros can you get?b. How much is one euro worth in dollars?c. If you have 5
Using Spot and Forward Exchange Rates Suppose the spot exchange rate for the Canadian dollar is Can$1.05 and the six-month forward rate is Can$1.03.a. Which is worth more, a U.S. dollar or a Canadian
Interest Rate Parity Use Figure 31.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 1.9 percent. What must the
The International Fisher Effect You observe that the inflation rate in the United States is 1.8 percent per year and that T-bills currently yield 2.3 percent annually.What do you estimate the
Spot versus Forward Rates Suppose the spot and three-month forward rates for the yen are ¥80.13 and ¥78.96, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate
Translation Exposure Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 34,000 solaris, debt in the amount of 12,000 solaris,
Using the Exact International Fisher Effect From our discussion of the Fisher effect in Chapter 6, we know that the actual relationship between a nominal rate, R , a real rate, r , and an inflation
What are the pros and cons of the international sales plan? What additional risks will the company face?Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in
A company’s first public equity issue is called an IPO for initial public offering. IPOs are generally underpriced. That is, the stock price in the aftermarket is normally above the issue price.
Announcements, Surprises and Expected Returns What is the difference between an expected return and observed return? Is it possible to predict the surprise component of an observed return?
Systematic versus Unsystematic Risk You own equity in Lewis-Striden Drugs plc. Suppose you had expected the following events to occur last month:(a) The government would announce that real GNP had
Systematic Risk and Betas What is data mining? Is there anything wrong with measuring the performance of an Irish growth fund portfolio manager against a benchmark composed of Greek equities?
Portfolios and Factor Models You have recently been employed as a finance consultant to Bread plc.The CEO wants to use an APT model to estimate the required return on the company’s stock, and the
Betas and Expected Returns Why does the market portfolio lie on the security market line? What does it mean if a security lies below the security market line? What would happen to the returns of the
APT Your manager tells you that, for the APT to be useful, the number of systematic risk factors must be small. Is your manager right? Explain.
Other Alternatives to CAPM You have been given an assignment to calculate the expected return on a listed firm in Malawi. What are the issues you would face and what are some possible solutions to
APT As financial director of Renault SA, you have been tasked with estimating the required return on the company’s equity. What risk factors should you use? Explain your choice.
Market Model versus the Fama and French (2016) Model What are the differences between the Fama and French (2016) model and the market model? Would you use this model in Europe? Explain why, or why
Price-based Pricing Models You are concerned about instability in the stock market and have decided to use a price-based model. Explain why you would choose this model and the weaknesses in such an
Factor Models You plan to purchase a company and wish to estimate the expected return on its equity using a three-factor model. You believe the appropriate factors are the market return, the
Factor Models Suppose a factor model is appropriate to describe stock returns for a company, with information about these factors set out in the table below. The expected return on the stock is 10.5
Factor Models Suppose the Fama–French (2016) five-factor model is appropriate to describe the returns of an equity. Information about those five factors is presented in the following table:Factor
Factor Models Suppose the Carhart (1997) factor model is appropriate to describe the returns on an equity. The current expected return on the equity is 10.5 per cent. Information about the factors is
Factor Models Suppose equity returns can be explained by the Fama–French three-factor model:R = ¯R   + β ( R M  −  r f )  + γHML + δSMB + εAssume there is no
Multifactor Models Suppose equity returns can be explained by the Fama–French three-factor model.The firm-specific risks for all equities are independent. The following table shows the information
Market Model Assume that the market model is given by:R i,t = α + β R M,t  +  ε i,t In this equation, Ri,t represents the return on asset i at time t; RM,t represents the return on a
Portfolio Risk You are forming an equally weighted portfolio of equities. Many equities have the same beta of 0.84 for factor 1 and the same beta of 1.69 for factor 2. They also have the same
Arbitrage Pricing Theory The returns on three equities, A, B and C, are given by the following:R A=2.4%  + 0.5 F 1 R B = 4.6%  + 1.2 F 1  − 0.5 F 2 R C=4.1% –0.4 F 1  + 0.6 F 2(a)

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