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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

1. Calculating Beta The returns of Siracha plc have a standard deviation of 40 per cent per annum and have a correlation with the FTSE 100 of 0.65. The standard deviation of the FTSE 100 is 20 per
1. Leverage Consider a levered firm’s projects that have similar risks to the firm as a whole. Is the discount rate for the projects higher or lower than the rate computed using the security market
1. Finding the Capital Structure Fama’s Llamas has a weighted average cost of capital of 11.5 per cent. The company’s cost of equity is 16 per cent, and its cost of debt is 8.5 per cent. The tax
1. Book Value versus Market Value Filer Manufacturing has 9.5 million shares of equity outstanding.The current share price is £53, and the book value per share is £5. Filer Manufacturing also has
1. Calculating the WACC In the previous problem, suppose the company’s equity has a beta of 1.2. The risk-free rate is 5.2 per cent, and the market risk premium is 9 per cent. Assume that the
1. WACC Kose SA has a target debt–equity ratio of 0.80. Its WACC is 10.5 per cent and the tax rate is 35 per cent.(a) If Kose’s cost of equity is 15 per cent, what is its pre-tax cost of debt?(b)
1. Finding the WACC Given the following information for Huntington Power, find the WACC. Assume the company’s tax rate is 28 per cent.Debt: 40,000 7 per cent coupon bonds outstanding, £100 par
1. Finding the WACC The power systems firm, Raging Volts, has a market value of equity of £15.77 billion and total debt of £1.21 billion. The cost of equity capital is 19.96 per cent and the cost
WACC and NPV Och SpA is considering a project that will result in initial after-tax cash savings of€3.5 million at the end of the first year, and these savings will grow at a rate of 5 per cent per
Preference Shares and WACC Bottled Water is a listed European company, which has a corporate finance structure as shown below. What is the company’s WACC?Debt: 50,000 bonds with a quoted price of
Project Evaluation This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial
Fresnillo plc explores and mines gold and silver in Mexico. The gold production accounts for 55 per cent of the activities of the firm, with the rest of the effort involved in silver mining. Other
1. Discuss the primary determinants of beta and how they can be measured. In Fresnillo’s case, what do you think will be the most important determinant? Explain. (30 marks)
How could Fresnillo reduce its equity cost of capital? Explain, using examples to illustrate your answer.(30 marks)
1 Go to Ryanair’s website and download its most recent financial accounts. Seek out the details on its borrowings and look for the coupon on its debt. If you cannot find it, you will need to go on
2 To estimate the cost of equity for MA, go to www.reuters.com and enter the ticker symbol ‘RYA.L’. Follow the various links to find answers to the following questions: What is the most recent
3 We now need to estimate the historical market risk premium. Go to Yahoo! Finance, download the monthly historical prices for the FTSE 100 index for the last five years. Calculate the monthly
4 Go to www.reuters.com and find the list of competitors in the industry. Find the beta for each of these competitors, and then calculate the industry average beta. Using the industry average beta,
5 You now need to calculate the cost of debt for Ryanair. Use the information on Ryanair bonds to find the weighted average cost of debt for Ryanair using the book value weights. Try to find bond
6 You now have all the necessary information to calculate the weighted average cost of capital for Ryanair.Calculate the weighted average cost of capital for Ryanair using book value weights and
7 You used Ryanair as a representative company to estimate the cost of capital for MA. What are some of the potential problems with this approach in this situation? What improvements might you
1 The Basic Forms of Acquisitions Describe the three main types of acquisitions and provide a real-life example of each. Which type of merger do you think creates more value for shareholders? Explain.
2 Synergy Explain the concept of synergy and provide examples of sources of synergy. Where does synergy come from? Is it possible that a merged company will not benefit from synergies? Discuss.
3 M&A Waves Why do you think that M&A activity often clusters in time, causing M&A waves? What M&A waves can you identify from history? Are there any factors that you think are uniquely favourable to
4 Bad Reasons for Mergers(a) Many explanations and justifications are made by acquiring (and sometimes target) managers for a merger. Review these justifications and discuss whether they are good or
5 Method of Payment in M&As Outline the two broad methods of payment in M&A transactions. What might determine the method of payment, and what impact does this have on both the acquiring and the
6 NPV of a Merger Describe the main uncertainties that are involved in a merger analysis. Are mergers an ideal activity in which to use real option valuation? Discuss some of the ways in which a real
7 Merger Valuation in Practice Discuss the main steps that are involved in a merger analysis.
8 Friendly versus 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
9 Defensive Tactics Review the various tactics that a target firm’s management may use when trying to deter a hostile takeover attempt. For each tactic, provide a balanced discussion of whether it
10 The Diary of a Takeover Compare and contrast a successful merger or acquisition with a failed one.What were the factors that contributed to the success and failure of the deals?
11 Managerial Motives for Takeovers Outline the managerial motives for takeovers.
12 Accounting for Mergers and Takeovers Explain the acquisition method of accounting for mergers and acquisitions. What effect does expensing merger costs have on the viability of a potential merger
13 Divestitures Why would a firm wish to sell off its assets? If the sold divisions are so bad, why are buyers found for them?REGULAR
15 Merger Rationale During the financial crisis that engulfed most of Europe, two large banks, Lloyds TSB Group and HBOS, merged in order to diversify risk. Is this a good or bad idea? Explain.
16 Corporate Split In 2019, the African conglomerate, Naspers Ltd, announced that it planned to spin off a new company that included its tech investments, ranging from food delivery to auction
17 Shareholder Rights Plans Are shareholder rights plans good or bad for equityholders? How do you think acquiring firms are able to get around them? What effect do you think the legal dubiety of
18 Merger and Taxes Many commentators have argued that differences in tax regulations, especially regarding mergers and acquisitions, have reduced the viability of this corporate activity. Do you
19 Economies of Scale Iberdrola, the Spanish electricity giant, has in recent years pursued an aggressive acquisition strategy throughout the world. Companies that have been acquired by the firm
20 Bid Offers In 2019, GuestReady, a company that helps Airbnb hosts manage their properties, purchased the France and Portugal-based rival BnbLord outright. Both companies provide services such as
21 Bid Offers Falcon plc and Thor plc have entered into a stock swap merger agreement whereby Falcon will pay a 30 per cent premium over Thor’s pre-merger price of £30. If Falcon’s pre-merger
22 Calculating Synergy Assume that ABC plc is planning to offer £30 billion cash for all of the equity in XYZ plc. Based on recent market information, XYZ is worth £20 billion as an independent
23 Balance Sheets for Mergers Consider the following pre-merger information about firm X and firm Y:Firm X Firm Y Total earnings (£) 74,000 35,000 Shares outstanding 21,000 10,000 Per share
24 Balance Sheets for Mergers Assume that the following balance sheets are stated at book value.Construct a post-merger balance sheet assuming that Reflection plc purchases Lhanger plc, and both sets
25 Balance Sheets for Mergers Silver Enterprises has acquired All Gold Mining in a merger transaction.Construct the balance sheet for the new corporation. The following balance sheets represent the
27 EPS, PE and Mergers The shareholders of Flannery SA have voted in favour of a buyout offer from Stultz plc. Information about each firm is given here:Flannery Stultz Price–earnings ratio 5.25 21
28 Merger Rationale Ziff Electrics (ZE) is a public utility that provides electricity to the whole Yorkshire region.Recent events at its Mile-High Nuclear Station have been discouraging. Several
30 Cash versus Equity as Payment In problem 29, are the shareholders of firm T better off with the cash offer or the equity offer? At what exchange ratio of B shares to T shares would the
31 Effects of an Equity Exchange Consider the following pre-merger information about firm A and firm B:Firm A Firm B Total earnings (DKr) 900 600 Shares outstanding 550 220 Price per share (DKr) 40
35 Mergers and Shareholder Value Gentley plc 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
36 Calculating NPV Plant AG is considering making an offer to purchase Palmer AG. Plant’s vice president of finance has collected the following information:Plant Palmer Price–earnings ratio 12.5
37 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
1 Linfrae plc is a computer software development firm and is considering a hostile takeover of Jaffikake plc, a software distribution firm. Linfrae has been advised by its investment bankers that a
2 It has been proposed that Linfrae plc should bid for Jaffikake using equity instead of cash. Linfrae’s investment bankers advise Linfrae to offer three shares of Linfrae for every one share of
3 Explain what is meant by vertical, horizontal and conglomerate mergers. Review the motives for undertaking each type of merger and provide real examples of each case. (40 marks)
1 Suppose Hybrid shareholders will agree to a merger price of €68.75 per share. Should Birdie proceed with the merger?Birdie Golf has been in merger talks with Hybrid Golf Company for the past six
2 What is the highest price per share that Birdie should be willing to pay for Hybrid?Birdie Golf has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of
3 Suppose Birdie is unwilling to pay cash for the merger but will consider an equity exchange. What exchange ratio would make the merger terms equivalent to the original merger price of €68.75 per
4 What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?Birdie Golf has been in merger talks with Hybrid Golf Company for the past six months. After several
2 The HBOS–Lloyds TSB merger was one of the biggest in European banking history. Both banks had been hit hard by the global banking crisis in 2008 and the British government strongly encouraged
1 Financial Distress Define financial distress using the value-based and flow-based approaches. Do you think these are appropriate definitions for financial distress? Explain.
2 What Happens in Financial Distress Review the turnaround strategies that firms can follow when in financial distress. Which do you think are most effective? Why?
3 Bankruptcy Liquidation and Administration What is the difference between administration and reorganization? What are some benefits of financial distress?
4 Private Workouts and Bankruptcy Do you think country-level institutional factors affect the turnaround strategies that financially distressed firms may adopt? What is the trade-off for policymakers
5 Predicting Financial Distress Review the variables and decision rule in Altman’s Z-score model.Why do you think these variables are important in predicting financial distress? Is Altman’s
6 Financial Distress What do you think are the main causes of financial distress? Explain your answer using a case study firm of your choice.
7 APR and DIP Loans What is the absolute priority rule? What are DIP loans? Where do DIP loans fall in the APR?
8 Costs of Bankruptcy What are the costs to a company of financial distress? Discuss your answer using a case study company of your choice.
9 Bankruptcy Ethics Firms that are in financial distress can use ‘prepack’ arrangements, where the financially distressed firm sells its assets and then immediately declares that it wishes to
11 Bankruptcy versus Private Workouts Empirical evidence has shown that private workouts are faster and more cost-effective than a Chapter 11 bankruptcy procedure. Yet, according to Wruck (1990),
12 Administration When Beacon Computers entered insolvency, it had the following balance sheet information:Liquidating Value (£) Claims (£)Trade credit 3,000 Secured mortgage notes 6,000 Senior
13 Administration When Masters Printing filed for bankruptcy, it entered administration. Key information is shown below. As trustee what reorganization plan would you accept?Assets (£) Claims
14 Insolvency Look at Carillion’s Z-scores. If you were the chief financial officer of Carillion, what would you view as being the most important issue for the future viability of the company?
15 Z-score Models An analyst may argue that Carillion was a special case because so much of its business was with the British government. Given its importance to UK industry, the ratios should not
16 Negative Equity Four of the Z-score variables were negative for Carillion. Does this explain why few people anticipated the insolvency before 2018? Explain. Why do you think Carillion wasn’t
17 Net Working Capital In 2019, one year after the death of Carillion, its erstwhile competitors had the following Z-scores. What does this say about the health of Carillion’s industry?K.H. Group
18 Turnaround Strategies Firms that are in financial distress sometimes increase the size of their assets.Explain why firms would pursue such a strategy instead of a more standard cost-cutting
19 Altman’s Z-score In 2019, Apple Inc. had the following data. Calculate its Altman Z-score. What can you say about the health of Apple Inc.?Total assets: $373,719 million Current assets: $140,828
20 Private Equity Many publicly traded financially distressed firms are purchased by private equity funds and delisted from the stock exchange. Several years later they are brought back to the
21 A listed company in which you have invested a lot of your personal wealth has just filed for insolvency.Using Altman’s Z-score analysis, would you have been able to predict its financial
1 Assume that you had taken over the financial manager’s role in 2019. Would you have predicted that HealingTech plc would be in financial distress within a year? Explain.In 2020, the wearable
2 Assume now that you are in 2020 and the company has experienced a torrid year. What is the Z-score for the firm? Does this give you any insight into the risk or insolvency status of the firm?In
3 Now that you know HealingTech is in financial distress, what are the different turnaround strategies you would follow? What do you think is most appropriate in this particular case? Explain.In
4 It is not difficult to find firms that are in financial distress. Download the financial accounts for five firms in your country that have performed poorly over the last year. Carry out a Z-score
1 Terminology Explain the difference between a domestic bond, a foreign bond and a Eurobond, and give an example of each.
2 Foreign Exchange Markets and Exchange Rates What is meant by triangular arbitrage? Is this likely to occur in real life? Explain.
3 Purchasing Power Parity Do you think purchasing power parity exists in the world economies?As country barriers fall, is purchasing power parity likely to become more prevalent? Does the empirical
4 Interest Rate Parity, Unbiased Forward Rates and the International Fisher Effect Review the international parity conditions. Which ones do you think are likely to exist and which are less likely to
5 International Capital Budgeting Should international capital budgeting projects be assessed from the perspective of a multinational’s subsidiary, or from the parent company? Are there any
6 Exchange Rate Risk In 2016 the British pound depreciated by approximately 20 per cent as a result of the British vote to leave the EU. In your opinion, did the depreciation in sterling damage the
7 Political Risk Why is country risk analysis important? Can multinationals reduce their exposure to country risk? As a result of Brexit, many companies announced contingency plans to move their
8 Islamic Financing Explain what is meant by Islamic financing. What are the different types of securities that are used in this sector? In this context, explain what is meant by a ‘sukuk’.
9 Spot and Forward Rates Suppose the exchange rate for the Australian dollar is quoted as $AUS3/£ in the spot market and $AUS4/£ in the 90-day forward market.(a) Is the British pound selling at a
10 Purchasing Power Parity Suppose the rate of inflation in the Eurozone will run about 3 per cent higher than the UK inflation rate over the next several years. All other things being the same, what
11 Exchange Rates The exchange rate for the Australian dollar is currently A$0.9641/US$. This exchange rate is expected to rise by 10 per cent over the next year.(a) Is the Australian dollar expected
12 Bulldog Bonds Which of the following most accurately describes a Bulldog bond?(a) A bond issued by Vodafone in Frankfurt with the interest payable in British pounds.(b) A bond issued by Vodafone
14 Islamic Financing Explain why leasing is consistent with Islamic financing principles. [Challenge: Explain what is meant by a ‘musharakah’ transaction in Islamic finance. Give an example to
15 Multinational Corporations Given that many multinationals have much greater sales outside their domestic markets than within them, what is the particular relevance of their domestic currency?
16 Exchange Rate Movements Are the following statements true or false? Explain why.(a) If the central bank decreases interest rates in the United Kingdom, but holds them constant in the United
17 Exchange Rate Movements Some countries encourage movements in their exchange rate relative to those of some other countries as a short-term means of addressing foreign trade imbalances. For each

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