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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

25 Shareholdings In 2012, Rangers Football Club had a majority shareholder, Craig Whyte, who owned 83.5 per cent of the firm. The same individual also owned secured debt worth £18 million and was
26 Cumulative Voting An election is being held to fill three seats on the board of directors of a firm in which you are a shareholder. The company has 2,500 shares outstanding. If the election is
27 Family Firms and Long-term Financing Assume that you are the manager of a family firm and the company wishes to expand its operations into a new unrelated business sector. The expansion requires
28 Financial Flexibility Your company plans to expand into a new business sector that requires higher levels of capital investment and fixed costs. Holding all else equal, what type of financing
29 R&D-intensive Firms If you are the manager of a young research-intensive firm, which type of financing would you prefer and why? Carry out research on research-intensive firms in your country.
1 Your company, Living Planet plc, was formed in 2015 to develop technologies that combat climate change.You started the firm with £80,000 financing, which consisted of 3,000 shares of equity
2 You are concerned that possibly other forms of financing may be more appropriate and, in particular, you have heard about hybrid securities. Explain what these are and why companies use them. (30
3 If a company were to go into liquidation, which claims would have higher priority: bonds or equity? Why?How would you deal with hybrid securities in liquidation? (30 marks)
1 How would you structure the share classes so that you retained control over the firm?In 2018, you launched a wearables technology firm with a single product. The product is a ring that measures
2 What are the criticisms of this approach as a signal of keeping your influence on the firm?In 2018, you launched a wearables technology firm with a single product. The product is a ring that
3 How would you sell this dual-class share structure to potential investors?In 2018, you launched a wearables technology firm with a single product. The product is a ring that measures heart rate,
4 Are there other ways you can guarantee your ongoing involvement in the firm?In 2018, you launched a wearables technology firm with a single product. The product is a ring that measures heart rate,
5 Choose a company from your country. Download its financial accounts and find out how its long-term funding is structured. Does it have more debt than equity? Are there any securities that have debt
6 As with all the chapters dealing with financial instruments, the main accounting standard is IAS 39 Financial Instruments: Recognition and Measurement. IAS 39 provides definitions for different
1 The Public Issue Review the steps involved in the public issue of equity. Do a search on Google for a public equity issue in your country, download all relevant news stories and track the issue
2 Alternative Issue Methods What is the difference between a public offering and a private placement?What might explain a company’s decision to favour one over the other? Your discussion should
4 Shelf Registration Explain the benefits of shelf registration. Why would shareholders not be keen on shelf registration?REGULAR
5 The Private Equity Market Provide an overview of the private equity market. Why would firms wish to go private once they have listed on a stock exchange? In March 2019, the British budget airline,
6 IPO Underpricing What is meant by underpricing? Why are most IPOs underpriced? Drawing on the academic evidence, explain the main theories behind this phenomenon. Is this a sign of market
7 IPO Pricing Unicredit, a multinational bank, had a rights issue in January 2012. Assisted by a consortium of banks including BofA Merrill Lynch and Mediobanca, Unicredit sold 3.86 billion shares at
8 Costs and Benefits of IPOs Outline the advantages and disadvantages for a company undertaking an IPO.
9 IPO Underpricing around the World IPO underpricing is a worldwide phenomenon. In the United Kingdom they are underpriced by around 16 per cent and most other advanced economies experience IPO
10 Cash Offer versus Rights Offer ThyssenKrup AG is an industrial component manufacturer based in Germany. Assume that it is considering opening a new plant in Poland. It has two choices to fund the
13 Competitive and Negotiated Offers Assume you have been hired by the Spanish food exporter, Distribuidora Internacional de Alimentacion SA to help progress a seasoned equity offering it plans to
14 Seasoned Equity Offers For the firm in question 13, you have been asked by a reporter why you are having a seasoned equity offering when typically share prices drop when they are announced. How
15 Raising Capital For the firm in question 13, you have been approached by a major shareholder who has asked you to consider either an underwritten cash offer or a rights issue (not underwritten) to
16 Shelf Registration Explain why shelf registration has been used by many firms. Why is it controversial?
17 IPOs Every IPO is unique, but what are the basic empirical regularities in IPOs?
18 Rights Offerings Balmorals plc is a well-established company that has run into difficulty in recent years.Its management has recently undertaken a review of its activities and has decided to
19 Rights Offering Faff plc has announced a rights issue to raise £50 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
24 Stock Offerings The Newton Company has 10,000 shares of equity that each sells for £40. Suppose the company issues 5,000 shares of the new equity at the following prices: £40, £20 and £10.
25 Seasoned Equity Issues What are the different methods through which a company can raise seasoned equity? What might explain a company’s decision to favour one over the other? Your discussion
27 Dilution Elvis Heavy Metal Mining (EHMM) plc wants to diversify its operations. Some recent financial information for the company is shown here:Share price (£) 98 Number of shares 14,000 Total
29 Rights A company’s equity currently sells for £45 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a shareholder must remit £10 and three rights.(a)
31 Rights Hoobastink Mfg. is considering a rights offer. The company has determined that the ex-rights price would be €52. The current price is €55 per share, and there are 5 million shares
32 Value of Right Show that the value of a right can be written as Value of a right = P RO  −  P X = ( P RO  −  P S )/ (N + 1)where PRO, PS and PX stand for the ‘rights-on’ price,
1 ‘In a public share issue, the probability of receiving an allocation of an underpriced security is less than or equal to the probability of receiving an allocation of an overpriced issue.’
2 Set out the terms of the issue under each of the two alternatives referred to above. Calculate the theoretical ex-rights price and the value of a right. (25 marks)
3 Demonstrate that, in principle, a wealth-maximizing shareholder owning six shares will be indifferent between the two alternative methods of raising the funds. (25 marks)
4 Discuss the benefits of using an underwriter in a rights issue. Review the factors that determine an underwriter’s fee. (25 marks)
1 At the end of the discussion Dan asks Robin about the Dutch auction IPO process. What are the differences in the expenses to West Coast Yachts if it uses a Dutch auction IPO versus a traditional
2 During the discussion of the potential IPO and West Coast Yachts’ future, Dan states that he feels the company should raise £50 million. However, Larissa points out that, if the company needs
3 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 £60 million. Ignoring
4 Many of the employees of West Coast Yachts have shares of equity in the company because of an existing employee stock purchase plan. To sell the equity, the employees can tender their shares to be
1 Do a search on Google News for 10 announcements of new funding for companies in the past year. Look at the share price between the announcement date and five days later. Can you see any pattern
1 The most important accounting standard for equities is IAS 39 Financial Instruments: Recognition and Measurement. Visit the IASPlus website (www.iasplus.com) for more information.
1 Debt Financing Review the characteristics of a bond. Why do you think short-term debt is known as unfunded debt and long-term debt as funded debt?
2 The Public Issue of Bonds Explain what is meant by a bond covenant and provide examples of the different forms of covenant you may see in a bond indenture. What are the costs and benefits of bond
3 Bond Refunding Why would a firm choose to issue callable bonds? Are there any disadvantages to issuing callable bonds? Explain.
4 Different Types of Bonds Explain what is meant by a sukuk. Why do you think it is called a bond?Global sukuk issuance has rapidly expanded over the last number of years. Why do you think this
5 Private Placement versus Public Issue What are the benefits of a private placement over a public issue of bonds?
6 Long-term Syndicated Bank Loans What are the main agency issues involved in a syndicated loan? Do you think syndicated loans should be priced differently from public debt issues? Explain.REGULAR
7 Bank Loans Bank loans have become significantly less popular as a financing source since the financial crisis.However, they retain their importance in many countries and are the major financing
8 Call Provisions Assume you work for Sacyr Vallehermoso SA, a Spanish company that offers construction services. The management has decided to have a long-term bond issue to fund investment in
9 Coupon Rate How would Sacyr Vallehermoso decide on an appropriate coupon rate to set on its bonds given that the investment is in China? Is the coupon rate the same as the required rate of return
10 Credit Ratings and Financial Markets Empirically, share prices and bond prices have been shown to react only to a small degree to credit rating changes, if at all. Why do you think this is?
11 Bond Ratings Governments, as well as companies, have credit ratings. What impact do you think a government’s credit rating has on a company that operates in that country?
12 Crossover Bonds Assume that Sacyr Vallehermoso had a bond issue and a credit rating from Moody’s and S&P. However, Moody’s has given a rating of Aaa and S&P has given a rating of BBB. What
13 Borrowing Choices Why might we expect firms with credit ratings in the middle of the spectrum to issue debt privately rather than publicly?
14 Bond Indentures Why do bonds have indentures? What, in your opinion, is the most important indenture for a bond? Are indentures more or less important for junk bond issues? Explain.
16 Bonds as Equity In 2018, Oxford University issued a 100-year bond. Critics charge that this issue is very similar to equity. Explain why critics would argue this is the case. Do you agree with the
19 Junk Bonds What is a ‘junk bond’? What are some of the controversies created by junk bond financing?By looking at the time series of bond defaults in Figure 16.3, can you think of a profitable
20 Sinking Funds What is a sinking fund covenant? Sinking funds have both positive and negative characteristics for bondholders. Why?
21 Mortgage Bonds Which is riskier to a prospective creditor – an open-end mortgage or closed-end mortgage? Why?
22 Public Issues versus Private Placements Which of the following are characteristics of public issues, and which are characteristics of private placements?(a) Stock exchange registration required(b)
23 Bond Ratings In general, why don’t bond prices change when bond ratings change?
24 Accrued Interest You purchase an Asian Paints Ltd bond on the Bombay Stock Exchange with an invoice price of R9,342. The bond has a coupon rate of 6.45 per cent, and there are five months to the
25 Accrued Interest You purchase a bond with a coupon rate of 5.2 per cent and a clean price of €865. If the next coupon payment is due in two months, what is the invoice price?
26 Bond Refunding Infineon AG plans to issue €500 million of bonds with a face value of €100,000, coupon rate of 3.5 per cent and 10 years to maturity. The current market interest rate on these
27 Bond Refunding Parto SpA has an outstanding perpetual bond with a 4 per cent coupon rate that can be called in one year. The bonds make annual coupon payments. The call premium is set at 120 per
28 Bond Refunding Mobistar intends to issue callable, perpetual bonds with annual coupon payments.The bonds are callable at €12,500. One-year interest rates are 6 per cent. There is a 60 per cent
29 Bond Refunding Heineken NV has decided to borrow money by issuing perpetual bonds with a coupon rate of 6 per cent, payable annually. The one-year interest rate is 6 per cent. Next year, there is
30 Bond Refunding An outstanding issue of Jeronimo Martins bonds has a call provision attached. The total principal value of the bonds is €120 million, and the bonds have an annual coupon rate of
31 Bond Refunding Charles River Associates is considering whether to refinance either of the two perpetual bond issues the company currently has outstanding. Here is information about the two bond
32 CoCo Bonds Consider convertible contingent bonds, also known as CoCo bonds. CoCo bonds have a strike price, which is set to be the cost of the issuing company’s equity when the bond is
33 Valuing the Call Feature Consider the prices in the following three Treasury issues as of 24 February 2020:6.500 16 May 106:10 106:12 −13 5.28 8.250 16 May 103:14 103:16 .-3 5.24 12.000 16 May
34 Negative Yields Over the past 10 years, some government bonds (for example, Switzerland and Japan)have traded at a negative yield to maturity. Why do you think investors are willing to buy bonds
35 Sukuk Medhat International is a manufacturing firm operated along Islamic principles. It wishes to raise 20 billion Bahrain dinars and pay this back in equal instalments over six years. Comparable
1 If the bonds are non-callable, what is the price of the bonds today? (30 marks)Stature Technologies plans to issue £100 million of bonds with a face value of £100,000, coupon rate of 4.125 per
2 If the bonds are callable one year from today at 115 per cent of face value, will their price be greater than or less than the price you computed in (1)? Why? (30 marks)Stature Technologies plans
3 If Stature Technologies wished to issue the bond (without call option) in Abu Dhabi as a sukuk, explain, using a diagram, how you would construct the Islamic bond. (40 marks)Stature Technologies
4.125 per cent and 10 years to maturity. The current yield to maturity of these bonds is 4 per cent. In one year, the yield to maturity on the bonds will be either 6 per cent or 3.75 per cent with
2 How many of the coupon bonds must West Coast Yachts issue to raise the £30 million? How many of the zeros must it issue?Larissa Warren, the owner of West Coast Yachts, has decided to expand her
3 In 20 years, what will be the principal repayment due if West Coast Yachts issues the coupon bonds?What if it issues the zeros?Larissa Warren, the owner of West Coast Yachts, has decided to expand
4 What are the company’s considerations in issuing a coupon bond compared to a zero coupon bond?Larissa Warren, the owner of West Coast Yachts, has decided to expand her operations. She asked her
5 Suppose West Coast Yachts issues the coupon bonds with a make-whole call provision. The make-whole call rate is the Treasury rate plus 0.40 per cent. If West Coast calls the bonds in seven years
6 Are investors really made whole with a make-whole call provision?Larissa Warren, the owner of West Coast Yachts, has decided to expand her operations. She asked her newly hired financial analyst,
7 After considering all the relevant factors, would you recommend a zero coupon issue or a regular coupon issue? Why? Would you recommend an ordinary call feature or a make-whole call feature?
1 Look up the websites and financial reports for Société Générale, Crédit Agricole, Enel SpA and ING Group, and find the credit rating for each firm. For some of these companies, you will need
2 The most important accounting standard for bonds is IAS 39 Financial Instruments: Recognition and Measurement. However, you should also know IAS 23 Borrowing Costs, which deals with the way
1 Types of Lease Financing What is a lease, and what are the different types of lease financing available to firms?
2 Accounting and Leasing What is meant by ‘off-balance-sheet financing’? Why has leasing historically been been viewed as off-balance-sheet funding when it appears in the financial statements? Is
3 The Cash Flows of Leasing If you did not have the financing to purchase an asset, would you compare it to the buy decision in your leasing analysis? Explain.
4 Discounting and Taxes In a world with taxes, why is WACC not appropriate for discounting cash flows in a lease-versus-buy decision? What is the appropriate discount rate when evaluating a lease?
5 Leasing You have recently joined the finance department of a large retail company, and your manager tells you that the company’s policy is to lease its assets, instead of buying them outright. He
6 Does Leasing Ever Pay? Explain why the reservation payment of a lease is the amount that makes the lessee indifferent between buying an asset and leasing it.
7 Reasons for Leasing Review the reasons why firms undertake leasing. Explain why some of these reasons are not beneficial for shareholders.
8 Unanswered Questions Why do some firms lease and others do not? What are some of the reasons why firms may or may not lease?REGULAR
9 Accounting for Leases Discuss how IFRS 16 treats finance and operating leases in the financial statements. In what ways does this impact the decision between debt financing and leasing?
10 Accounting for Leases In 2019, IFRS 16 changed the way leases were treated in the financial statements.Carry out your own research on the new standard and discuss what progress has been made. What

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