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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

21 FX Risk What are the types of foreign exchange risk a multinational faces? How do these risks arise? Explain.
22 International Borrowing If a South African firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in South Africa? How would you overcome them?
24 Eurobonds Explain motives companies might have for raising money on the international bond markets.
25 Using Exchange Rates Take a look back at Figure 30.1 to answer the following questions.(a) If you have €100, how many British pounds can you get?(b) How much is one pound worth against the
26 Using the Cross-rate Use the information in Figure 30.1 to answer the following questions.(a) Which would you rather have, €100 or £100? Why?(b) Which would you rather have, 100 Swiss francs
27 Forward Exchange Rates Use the information in Figure 30.1 to answer the following questions.(a) If the three-month forward rate for the US dollar per euro F90 = $1.3215 (per €), is the dollar
29 Cross-rates and Arbitrage Use Figure 30.1 to answer the following questions.(a) What is the cross-rate in terms of Rwandan franc per Thai baht?(b) Suppose the cross-rate is 12 Rwandan franc = 1
30 Interest Rate Parity Use Figure 30.1 to answer the following question. Suppose interest rate parity holds and the current annual risk-free rate in the Eurozone is 3.8 per cent. Assume the UK
31 Interest Rates and Arbitrage The treasurer of a major British firm has £30 million to invest for three months.The annual interest rate in the United Kingdom is 0.45 per cent per month. The
32 Inflation and Exchange Rates Suppose the current exchange rate for the Polish zloty is Z5.1134/£.The expected exchange rate in three years is Z5.2/£. What is the difference in the annual
33 Exchange Rate Risk Suppose your company, which is based in Nantes, imports computer motherboards from Singapore. The exchange rate is given in Figure 30.1. You have just placed an order for 30,000
34 Exchange Rates and Arbitrage Suppose the spot and six-month forward rates on the Swedish krona are SKr10.7917/£ and SKr12.00/£, respectively. The annual risk-free rate in the United Kingdom is
36 Spot versus Forward Rates Suppose the spot and three-month forward rates for the Indian rupee are R68.81/€ and R61.8/€, respectively.(a) Is the rupee expected to get stronger or weaker?(b)
37 Expected Spot Rates Suppose the spot exchange rate for the Tanzanian shilling is TSh2500/£.The inflation rate in the United Kingdom is 3.5 per cent and it is 8.6 per cent in Tanzania. What do you
38 Forward Rates The spot rate of foreign exchange between the United States and the United Kingdom is$1.6117/£. If the interest rate in the United States is 13 per cent and it is 8 per cent in the
40 Islamic Financing You plan to raise funds through following Islamic principles. You require funding today of 3 billion Bahrain dinars and would like to pay it back in equal amounts over 10 years
41 Capital Budgeting As a German company, you are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SFr27.0 million. The cash flows
42 Murabahah You manage an Islamic financing division and have been approached by a company for funding of 6 billion Bahrain dinars. The company wishes to pay the funding back in equal instalments
43 Ijarah Thumma Al Bai’ You run an Islamic financing division and have been approached by a customer for a 40,000 Bahrain dinar ijarah thumma al bai’ financing deal. The customer wishes to pay a
44 Bai’ Al-Inah You run an Islamic financing bank and have been approached by a company to construct a sale and buyback financing deal. The firm requires financing of £8 billion and wishes to pay
1 Calculate the percentage appreciation of the euro against the dollar over the previous year. Calculate the percentage appreciation of sterling against the dollar over the previous year. (20
2 Calculate the percentage appreciation or depreciation of sterling against the euro over the previous year. Calculate the percentage appreciation or depreciation of the euro against sterling over
3 Does the percentage appreciation or depreciation of sterling in (1) equal the euro depreciation or appreciation in (2) multiplied by negative one? Explain your answer. (20 marks)On 24 April 2019,
4 Review the international parity conditions. Do you believe they work? Explain. (40 marks)On 24 April 2019, the €/$ exchange rate was €0.89/$ compared to €0.82/$ exactly one year before. On
2 What will happen to the company’s profits if the British pound strengthens? What if the British pound weakens?Larissa Warren, the owner of West Coast Yachts, has been in discussions with a yacht
3 Ignoring taxes, what are West Coast Yachts’ projected gains or losses from this proposed arrangement at the current exchange rate of €1.12/£? What will happen to profits if the exchange rate
1 The Islamic Bank of Britain (IBB) released a new product in 2020 called a Home Purchase Plan (HPP).This product allows individuals to invest over the long term in a mortgage-equivalent financing
18 Agency Costs Tom Scott is the owner, chairman and primary salesperson for Scott Manufacturing.Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40
19 Capital Structure and Growth Transvaal Ltd currently has debt outstanding with a market value of R980,000 and a cost of 10 per cent. The company has an EBIT of R98,000 that is expected to continue
20 Capital Structure and Non-marketed Claims Suppose the chief executive of the company in the previous problem stated that the company should increase the amount of debt in its capital structure
22 Agency Costs Kasna Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Kasna must choose
23 Financial Distress Good Time plc is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 per cent and the probability of a
24 Personal Taxes, Bankruptcy Costs and Firm Value When personal taxes on interest income and bankruptcy costs are considered, the general expression for the value of a levered firm in a world in
25 Personal Taxes, Bankruptcy Costs and Firm Value Overnight Publishing SA (OP) has €2 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to
26 Islamic Financing Islamic financing forbids the use of interest in any financial security, and this will clearly have an impact on the capital structure decisions of firms that follow Shariah
27 Corporate Pension Plans Many firms have pension plans for their employees that are heavily in deficit(i.e., the asset value of the fund is less than the present value of its future pension
28 Guaranteed Debt Many companies in emerging markets use AAA-rated firms in the West to guarantee any debt issue that is made by the firm. A good example is the Bakrie family in Indonesia, who used
29 Debt Buybacks Companies in financial distress often bring their leverage ratios down to much lower levels until such periods as they are able to turn around operations and generate profit. A
30 Market Timing Theory Look again at Figure 19.4. Can you provide a market timing interpretation to the distribution of gearing ratios in the diagram? Can you provide a more plausible or intuitive
1 Determine the expected earnings per share for the company before and after the debt issue. (20 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The company
2 Using your answer to part (1), discuss the use of earnings per share as a basis for financial decision taking.(20 marks)Biller Industries plc is a global haulage equipment and scaffolding
3 Determine the value of Biller Industries plc after restructuring and the value of its equity using the Modigliani–Miller model with corporate taxes. (15 marks)Biller Industries plc is a global
4 Determine the cost of equity for Biller Industries plc before and after the debt issue. (15 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The company has
5 If the Miller (debt and taxes) model holds and capital gains tax is 28 per cent, corporation tax is 18 per cent and personal tax rate on interest income is 45 per cent, estimate the value of Biller
6 Determine the personal tax rate on interest income at which the tax advantage of debt is zero. (15 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The
1 What is the expected value of the company in one year, with and without expansion? Would the company’s shareholders be better off with or without expansion? Why?Sam McKenzie is the founder and
2 What is the expected value of the company’s debt in one year, with and without the expansion?Sam McKenzie is the founder and CEO of McKenzie Restaurants plc, a British company. Sam is considering
3 One year from now, how much value creation is expected from the expansion? How much value is expected for shareholders? For bondholders?Sam McKenzie is the founder and CEO of McKenzie Restaurants
4 If the company announces that it is not expanding, what do you think will happen to the price of its bonds? What will happen to the price of the bonds if the company does expand?Sam McKenzie is the
5 If the company opts not to expand, what are the implications for the company’s future borrowing needs?What are the implications if the company does expand?Sam McKenzie is the founder and CEO of
6 Because of the bond covenant, the expansion would have to be financed with equity. How would it affect your answer if the expansion were financed with cash on hand instead of new equity?Sam
1 For this case study, you will need to access Yahoo! Finance. For your own country, choose an industry and find the debt to equity ratio of each company in the industry. Now choose another country
1 Adjusted Present Value How is the APV of a project calculated? What about the FTE? What is the main difference between the APV, FTE and WACC?
2 Net Asset Value What is the main difference between net asset value and net present value? Why is net asset value important in mining investments?
3 Weighted Average Cost of Capital Is WACC consistent with a target debt–equity ratio? Explain.
4 APV, FTE and WACC Compare and contrast the three methods of capital budgeting. What are their strengths and weaknesses? When and why should you use each method instead of the other two? Are the
5 Discount Rate in Capital Budgeting Review the steps required in calculating the correct discount rate for capital budgeting when a firm has a high level of debt in its capital structure.
6 Beta and Leverage What are the two types of risk that are measured by a levered beta?REGULAR
7 Capital Budgeting You are determining whether your company should undertake a new project and have calculated the NPV of the project using the WACC method when the CFO, a former accountant, notices
8 NPV and APV Zoso is a rental car company that is considering whether to add 25 cars to its fleet. The company depreciates all its rental cars using 20 per cent reducing balance, and at the end of
9 NPV Capital Budgeting Culdesac NV has developed a design for new wireless noise-reducing earphones and is considering whether it should replace its existing wired earphones, whose popularity has
10 APV Gemini plc, an all-equity firm, is considering a €2.4 million investment that will be depreciated according to 25 per cent reducing balances. At the end of its four-year life, the investment
11 Flow to Equity Milano Pizza owns three identical restaurants popular for their specialty pizzas.Each restaurant has a debt–equity ratio of 40 per cent and makes interest payments of €29,500 at
14 Beta and Leverage Maersk A/S and Lundberg A/S would have identical equity betas of 0.9 if both were all equity financed. The market value information for each company is shown here:Maersk A/S
15 NPV of Loans Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a six-year, 13 per cent loan with gross proceeds of €9,000,000. The interest payments on the loan will be made annually.
17 NPV for an All-equity Company Shattered Glass plc is an all-equity firm. The cost of the company’s equity is currently 22 per cent, and the risk-free rate is 3 per cent. The company is currently
18 WACC XYZ plc is considering purchasing new equipment that would cost £40 million. The expected unlevered cash flows from this investment are £13 million per annum for the next five years. The
19 WACC Bolero plc has compiled the following information on its financing costs:Type of Financing Book Value (£) Market Value (£) Cost (%)Long-term debt 2,000,000 2,000,000 3.5 Short-term debt
20 NAV Letlago plc has established a joint venture with Wannako Ltd to build a new gold mine in Kenya. The initial investment in paving equipment is £12 million. The equipment will be depreciated
21 NAV For the company in the previous problem, what is the value of being able to issue subsidized debt instead of having to issue debt at the terms it would normally receive? Assume the face amount
22 APV MVP GmbH has produced football supplies for more than 20 years. The company currently has a debt–equity ratio of 50 per cent and is in the 29.8 per cent tax bracket. The required return on
23 WACC Neon Corporation’s share price returns have a covariance with the market portfolio of 0.048. The standard deviation of the returns on the market portfolio is 20 per cent, and the expected
25 APV, FTE and WACC Mojito Mint Company has a debt–equity ratio of 0.45. The required return on the company’s unlevered equity is 17 per cent, and the pre-tax cost of the firm’s debt is 9 per
26 APV, FTE and WACC Lone Star Industries has just issued £160,000 of perpetual 10 per cent debt and used the proceeds to repurchase equity. The company expects to generate £75,000 of earnings
27 Projects that Are Not Scale Enhancing Blue Angel Ltd, a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of 0.40, but
28 Equivalence of WACC and APV Read the paper by M. Massari, F. Roncaglio and L. Zanetti, ‘On the Equivalence between the APV and the WACC Approach in a Growing Leveraged Firm’, European
29 Equivalence of WACC and APV Select a range of empirical studies on capital budgeting and discuss their findings. What, in your opinion, are the most interesting findings?
30 NPV After graduating from university you get a job for a non-dividend paying company which has recently listed on the stock exchange. Your manager tells you that the company does not favour the
1 Their first option concerns the use of debt financing. The underwriters suggest that a 10-year bond issue with a 7 per cent coupon may be a sensible route to raising these funds. If interest
2 The second option relates to equity financing. The underwriters believe that, if the company were to issue shares to fund the proposed project, they would have to be sold at a discount of 20 per
3 Review the ways in which positive net present value opportunities may arise when a company wishes to raise funds in the financial markets. Use an example to illustrate your answer. (25
4 Compare and contrast the strengths and weaknesses of the adjusted present value, weighted average cost of capital, and flow to equity approaches to investment appraisal. Which method, in your
5 Cheek Products Ltd was founded 53 years ago by Joe Cheek, and originally sold snack foods such as crisps and biscuits. Through acquisitions, the company has grown into a conglomerate with major
6 We now return to our Cement example in Chapters 7 and 8. So far, we have gone with a consensus discount rate and assumed away any complications from leverage. The cement company for which you are
1 Different Types of Dividends Explain the difference between a cash dividend, a stock dividend, a special dividend and a stock buyback.
2 The Dividend Payment Process How is it possible that dividends are so important, but at the same time dividend policy is irrelevant? When a dividend is paid, give some reasons why the share price
3 Disappearing Dividends Explain what is meant by the disappearing dividend phenomenon. What are the competing explanations for the phenomenon?
4 Share Repurchases Stock buybacks are happening in rapid succession among companies all over the world.Is this good or bad news for shareholders? Explain.
5 Dividends, Taxes, and other Real-world Factors Explain the importance of taxes in dividend policy.What are the real-world factors that would encourage firms to follow a high dividend policy?
6 Agency Theory and Payout Policy Explain the role of agency conflicts between managers, shareholders and bondholders in corporate payout policy.
7 Clienteles What is meant by dividend clienteles? If dividend clienteles exist, what does that imply for firms that adopt a new dividend policy in order to increase firm value?
8 Catering Theory What is the catering theory of dividends and how would it influence a manager looking to improve the value of her firm through dividend policy? What does the empirical evidence say
9 Dividend Policy in Practice Under the assumptions set out by Modigliani and Miller, is a firm with a low payout dividend stream that uses retentions to finance investment more or less viable than a
10 Stock Dividends and Stock Splits Why would firms have a reverse split? Should a reverse split have any impact on the value of the firm?REGULAR
12 Dividends and Clientele Bodyswerve plc has experienced significant performance gains over previous years and there is no reason to expect any different in the future. The firm has engaged with a
13 Dividends and Taxes You are approaching retirement and considering ways to minimize the tax bill from your investment portfolio. Assuming that you are only investing in equities within your own
14 Dividends versus Capital Gains It is clear in many countries that investors prefer dividend-paying stocks to those that pay no dividends. How do you explain this if dividend policy is irrelevant?
15 Dividend Irrelevancy ‘We must ensure that dividends do not fall from one year to the next, even if our company makes a loss. However, if we make a profit then we should increase the dividend.’
16 Share Repurchases MUG Company has a market capitalization of £1 billion and 20 million shares outstanding.Its board has decided to distribute £100 million to shareholders through a repurchase
18 Stock Dividends The shareholder equity accounts for Hexagon International are shown here:£Ordinary shares (£1 par value) 10,000 Capital surplus 180,000 Retained earnings 586,500 Total owners’

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