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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

Partnerships What are the differences between a general partnership and a limited partnership? Why do firms choose to be partnerships instead of limited liability corporations?
Organizations Is it possible for a firm to move from being a limited corporation to a partnership? Explain when this may happen.
Corporate Governance Principles Discuss the UK Corporate Governance Code. In what ways is it different to the G20/OECD Corporate Governance Principles?
Corporate Governance Principles Is it possible to improve one governance principle in a firm but weaken another at the same time? Use an illustration to explain your answer.
Corporate Governance Policy How do differences in the macro environment affect corporate governance?
Principles of Good Governance Discuss the G20/OECD Principles of Good Governance in detail, commenting on the major principles contained in it. In your opinion, what is the most important (if
Regulatory Governance You have been appointed as a consultant for a very poor country in Africa, with no corporate governance regulations, and have been asked to formulate an appropriate corporate
Audit Committees The audit committee of a firm is an integral part of its corporate governance. Explain what an audit committee is, why it is important, its main responsibilities, and how you can
Agency Relationships Who owns a corporation? How do owners control the firm’s management. What is an agency relationship and what is the main reason an agency relationship exists?
Government Ownership After the 2008 financial crisis, some governments took control of banks through buying their shares. What impact does this have on the lending culture of banks? Is this
Managerial Objectives Why would we expect managers of a corporation to pursue the objectives of shareholders? What about bondholders?CHALLENGE
Codes of Corporate Governance Choose a developed and an emerging market economy, and identify any differences and similarities between your chosen countries.
Board of Directors You have been hired as a consultant to evaluate the performance of a board of directors. What things would you look for? Why would shareholders want to hire a consultant to do such
Managerial Ownership How do agency costs in a firm change as managers build up their shareholdings?What does it mean when we say that managers are entrenched? Provide some examples of real-life cases
Executive Compensation Critics have charged that compensation to top managers in the banking sector is simply too high and should be cut back. Look at the financial accounts of some banks in your
Managerial Objectives 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 set up
How can the board maintain control of the firm while having only 20 per cent of the shares? (20 marks)As the financial manager of an unlisted manufacturing company based in Amsterdam, you have been
Should the company’s board structure change? If so, what should be done and why? (20 marks)As the financial manager of an unlisted manufacturing company based in Amsterdam, you have been tasked
What processes should be put in place to ensure that all shareholders have some say in the company’s strategy? How should the company deal with foreign shareholders? (20 marks)As the financial
How should the company decide upon director remuneration? Are there any structures that should be put in place to ensure that the directors are fairly compensated for the work that they have done?
There is a proposal that the company should instead possibly list in London or Shanghai and move its headquarters to the listing location. Are there any institutional differences that the directors
Write a consultancy report that evaluates the current structure and quality of corporate governance in an organization (listed/unlisted/for-profit/non-profit) of your choice.You are required to
Venture capital is a common source of financing in start-up and privately held firms.Venture capital is particularly important in financing high-tech enterprises. Venture capital financing was at its
A seasoned equity offering (SEO) refers to a new issue when the company’s securities have already been publicly traded. On average, the stock price of the issuing company falls upon the
The underwriter bears risk with a firm commitment because it buys the entire issue.Conversely, the investment banker avoids this risk under a best-efforts offering because it does not purchase the
Rights offerings are cheaper than general cash offers and eliminate the problem of underpricing. Yet most new equity issues in the U.S. are underwritten general cash offers.
While dilution in stock price hurts stockholders, dilution of proportionate interest, book value per share, and EPS—by themselves—do not.
Shelf registration is a new method of issuing new debt and equity. The direct costs of shelf issues seem to be substantially lower than those of traditional issues.
Underpricing in Debt Offerings Why is underpricing not a great concern with bond offerings?Use the following information to answer the next three questions. Zipcar, the car sharing company, went
IPO Pricing The Zipcar IPO was underpriced by about 56 percent. Should Zipcar be upset at Goldman over the underpricing?
IPO Pricing In the previous question, how would it affect your thinking to know that the company was incorporated about 10 years earlier, had only $186 million in revenues in 2010, and had never
IPO Pricing In the previous two questions, how would it affect your thinking to know that in addition to the 9.68 million shares offered in the IPO, Zipcar had an additional 30 million shares
Competitive and Negotiated Offers What are the comparative advantages of a competitive offer and a negotiated offer, respectively?
Seasoned Equity Offers What are the possible reasons why the stock price typically drops on the announcement of a seasoned new equity issue?
Raising Capital Megabucks Industries is planning to raise fresh equity capital by selling a large new issue of common stock. Megabucks, a publicly traded corporation, is trying to choose between an
Shelf Registration Explain why shelf registration has been used by many firms instead of syndication.
IPOs Every IPO is unique, but what are the basic empirical regularities in IPOs?
Rights Offerings Again, Inc., is proposing a rights offering. Presently, there are 550,000 shares outstanding at $87 each. There will be 85,000 new shares offered at$81 each.a. What is the new market
Rights Offering The Clifford Corporation has announced a rights offer to raise$28 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the
IPO Underpricing The Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of these is undervalued by $9, and the other is overvalued by$4, but you have no way of knowing which
Calculating Flotation Costs The St. Anger Corporation needs to raise $45 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to
Calculating Flotation Costs The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received $26.04 for each of the 7 million shares sold. The initial offering price
Price Dilution Raggio, Inc., has 135,000 shares of stock outstanding. Each share is worth $75, so the company’s market value of equity is $10,125,000. Suppose the firm issues 30,000 new shares at
Stock Offerings The Newton Company has 50,000 shares of stock that each sell for $40. Suppose the company issues 9,000 shares of new stock at the following prices: $40, $20, and $10. What is the
Dilution The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:INTERMEDIATE(Questions 10–18)Stock
Dilution In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $75 per share? (Assume the PE ratio remains constant.) What is the
Rights A company’s stock currently sells for $68 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit$11 and three rights.a. What is
Rights Hoobastink Mfg. is considering a rights offer. The company has determined that the ex-rights price will be $61. The current price is $68 per share, and there are 10 million shares outstanding.
Value of a Right Show that the value of a right can be written as:Value of a right 5 P RO 2 P X 5 ( P RO 2 P S )/( N 1 1)where P RO , P S , and P X stand for the “rights-on” price, the
Selling Rights Wuttke Corp. wants to raise $5,375,000 via a rights offering. The company currently has 950,000 shares of common stock outstanding that sell for$55 per share. Its underwriter has set a
Valuing a Right Mitsi Inventory Systems, Inc., has announced a rights offer.The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $30.
At the end of the discussion Dan asks Robin about the Dutch auction IPO process.What are the differences in the expenses to East Coast Yachts if it uses a Dutch auction IPO versus a traditional IPO?
During the discussion of the potential IPO and East Coast Yachts’ future, Dan states that he feels the company should raise $75 million. However, Larissa points out that if the company needs more
After deliberation, Larissa and Dan have decided that the company should use a firm commitment offering with Crowe & Mallard as the lead underwriter. The IPO will be for $85 million. Ignoring
Many of the employees of East Coast Yachts have shares of stock in the company because of an existing employee stock purchase plan. To sell the stock, the employees can tender their shares to be sold
Merger Accounting Explain the purchase accounting method for mergers. What is the effect on cash flows? On EPS?
Poison Pills Are poison pills good or bad for stockholders? How do you think acquiring firms are able to get around poison pills?
Economies of Scale What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time
Hostile Takeovers What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the target firm shareholders benefit from the defensive
Merger Offers Suppose a company in which you own stock has attracted two take over offers. Would it ever make sense for your company’s management to favor the lower offer? Does the form of payment
Merger Profit Acquiring firm stockholders seem to benefit little from takeovers.Why is this finding a puzzle? What are some of the reasons offered for it?
Calculating Synergy Evan, Inc., has offered $340 million cash for all of the common stock in Tanner Corporation. Based on recent market information, Tanner is worth$317 million as an independent
Balance Sheets for Mergers Consider the following premerger information about firm X and firm Y :Firm X Firm Y Total earnings $90,000 $52,200 Shares outstanding 46,800 36,000 Per-share values:Market
Balance Sheets for Mergers Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $15,000 for James
Incorporating Goodwill In the previous problem, suppose the fair market value of James’s fixed assets is $15,000 versus the $8,900 book value shown. Jurion pays$23,000 for James and raises the
Balance Sheets for Mergers Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase for
Incorporating Goodwill In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of
Cash versus Stock Payment Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flow
EPS, PE, and Mergers The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:Flannery Stultz Price–earnings
Merger Rationale Cholern Electric Company (CEC) is a public utility that provides electricity to the central Colorado area. Recent events at its Mile-High Nuclear Station have been discouraging.
Cash versus Stock as Payment Consider the following premerger information about a bidding firm (Firm B ) and a target firm (Firm T ). Assume that both firms have no debt outstanding.Firm B Firm T
Effects of a Stock Exchange Consider the following premerger information about Firm A and Firm B :Firm A Firm B Total earnings $2,100 $700 Shares outstanding 900 300 Price per share $ 60 $ 17 Assume
Mergers and Shareholder Value Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here:State
Calculating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information:Plant Palmer Price–earnings ratio
Mergers and Shareholder Value The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated.Both companies are exactly alike except that
Suppose Hybrid shareholders will agree to a merger price of $68.75 per share. Should Birdie proceed with the merger?Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past
What is the highest price per share that Birdie should be willing to pay for Hybrid?Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds
Suppose Birdie is unwilling to pay cash for the merger but will consider a stock exchange. What exchange ratio would make the merger terms equivalent to the original merger price of $68.75 per
What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After
Costs of Float Purple Feet Wine, Inc., receives an average of $16,000 in checks per day. The delay in clearing is typically three days. The current interest rate is.018 percent per day.a. What is the
NPV and Collection Time Your firm has an average receipt size of $117. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically
Value of Lockboxes Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:Average number of payments per day 435 Average value
Lockboxes and Collections It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to
NPV and Reducing Float No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $3.2 million in collections a day and requires a $350,000 compensating balance. No More
Lockboxes and Collection Time Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering
Calculating Transactions Required Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the
What is Richmond Corporation’s total net cash flow from the current lockbox system available to meet payroll?Richmond Corporation was founded 20 years ago by its president, Daniel Richmond.The
Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?Richmond Corporation was founded 20 years ago by its president, Daniel Richmond.The
What cost of ACH transfers would make the company indifferent between the two systems?Richmond Corporation was founded 20 years ago by its president, Daniel Richmond.The company originally began as a
Credit Period Length What are some of the factors that determine the length of the credit period? Why is the length of the buyer’s operating cycle often considered an upper bound on the length of
Just-in-Time Inventory If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity
ACP and Accounts Receivable Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/15, net 30.Based on experience, 65 percent of all customers will take the
Size of Accounts Receivable Tidwell, Inc., has weekly credit sales of $27,500, and the average collection period is 27 days. The cost of production is 75 percent of the selling price. What is the
Terms of Sale A firm offers terms of 1/10, net 30.What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will
Size of Accounts Receivable Essence of Skunk Fragrances, Ltd., sells 4,900 units of its perfume collection each year at a price per unit of $495. All sales are on credit with terms of 1/10, net
Size of Accounts Receivable The Arizona Bay Corporation sells on credit terms of net 30.Its accounts are, on average, 6 days past due. If annual credit sales are$9.3 million, what is the company’s
Credit Policy Evaluation Lealos, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Lealos
Credit Policy Evaluation The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington
Credit Policy Evaluation Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days.Based on the following
Credit Policy The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 600 bicycles.The average cost to the shop of a

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