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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Is it possible to exploit irrational behaviour when it arises? If any investor can identify that the market is acting irrationally, giving rise to a gap between market share price and underlying
If the stock market is efficient, can no one beat the market average return?
Palmerston plc operates in both the United Kingdom and Germany. In attempting to assess its economic exposure, it compiles the following data:UK sales are influenced by the euro’s value as it faces
For planning purposes, Year 5 is the cut-off year, when the realisable value of the plant and equipment is estimated at L24 million. The working capital will be realised, subject to losses of L2
Brighteyes plc manufactures medical and optical equipment for both domestic and export sale. It is investigating the construction of a manufacturing plant in Lastonia, a country in the former Soviet
The terminal value of the project is estimated at C$50,000, net of tax.The current spot rate for C$ against the pound sterling is 1.70. Economic forecasters expect the pound to strengthen against the
PG plc is considering investing in a new project in Canada that will have a life of four years. Initial investment is C$150,000, including working capital. The net cash flows that the project will
OJ Limited is a supplier of leather goods to retailers in the United Kingdom and other Western European countries. The company is considering entering into a joint venture with a manufacturer in
The USD vs. GBP exchange rate is $1.50 vs. £1. A UK MNC operating in the United States plans to sell goods worth$100 million at today’s prices to US customers. Show that its GBP revenue in real
List eight ways in which MNCs can lower political risk.
Revisit Self-assessment exercise 22.6. Suggest three ways for the firm to lower its exposure.
A UK-owned MNC produces in the United States and also exports to South American countries directly from the United Kingdom where it is paid in USD. Its US revenue is $50 million and its operating
A UK MNC earns cash flow (all taxable) of $100 million in the United States. What is its overall tax bill if the rate of tax on profits in both the United States and the United Kingdom is 30 per cent
An ungeared UK firm, with a Beta of 1.4, plans to invest in an emerging country that has no stock exchange. Its economy has a weak correlation (0.4) with the United Kingdom. Due to operating gearing,
How does FDI differ from domestic investment?
What is meant by a multinational corporation?
Identify political and country risk, and appreciate how to manage these.
Assess different ways of insulating projects against foreign exchange risk.
Gauge the impact of foreign exchange variations on foreign projects.
Analyse and explain the appraisal of FDI projects.
Appreciate the particular complexities of foreign direct investment (FDI).
Evaluate different ways of entering foreign markets.
Understand the advantages of MNCs.
TLC Inc manufactures pharmaceutical products. The organisation exports through a worldwide network of affiliated organisations. Its headquarters are in the United States, but there is a large volume
Ashton plc, a UK-based firm, imports computer components from the Far East. The trading currency is Singapore dollars and the value of the deal is 28m Singapore dollars (S$). Three months’ credit
Exchange-traded foreign currency option prices for dollar/sterling contracts are shown below:Sterling (£12,500) contracts Calls Puts Exercise price ($) December September December September 1.90
Slade plc is a medium-sized UK company with export and import trade links with US companies. The following transactions are due within the next six months. Transactions will be in the currency
Europa plc is a UK-based import–export company. It is now 15 May and the following transaction has been agreed:The sale of pine furniture worth $1,250,000 to the United States receivable on 15
Assume you are the treasurer of a multinational company based in Switzerland. Your company trades extensively with the United States. You have just received US$1 million from a customer in the United
The respective interest rates in the United States and the United Kingdom are 9 per cent and 10 per cent, respectively, in annual terms. If the spot exchange rate is US$1.6000 to £1, what is the
A selected bundle of goods costs £100 in the United Kingdom, and a similar bundle costs 1,200 krona (DKR) in Denmark. People generally expect the rate of inflation to be 5 per cent in the United
Work out the forward outrights from the exchange rates versus sterling given in the table below.Country/Currency Closing market rates One-month forward rates Denmark/krona 10.960–10.967 -25–11
On 30 November, a UK exporter sells goods worth £10 million to a French importer on three months’ credit. The customer is billed in euros, for which the spot rate versus sterling is €1.6 vs.
The Local Bank plc quotes the following rates for the euro versus sterling:1.6296–1.6320(a) How many euros would a firm receive when selling £10 million?(b) How much sterling would it receive when
What is the net cost/benefit of an option that is ‘at the money’?
Delete as appropriate.Leading is advancing outflows in a strong/weak currency and advancing inflows in a strong/weak currency. Lagging is delaying inflows in a strong/weak currency and delaying
Langer plc, a UK firm, is worried about a fall in the Australian dollar by 5 per cent, compared to the present A$1.75 per £1, that might inflict translation losses regarding its A$100 million assets
If interest rates are higher in London than New York by 2.5 per cent p.a. and today’s spot rate is $2.0250 vs. £1, what would you expect the three-month forward quotation to be if IRP applied?
Use the Law of One Price and PPP to predict the relative local prices of a cup of coffee and the future sterling/dollar spot rate under the following conditions:Price now in New York = +2.00 Price
Distinguish between translation, transaction and economic exposure.
What is the distinction between a foreign exchange ‘speculator’ and a ‘hedger’? How would you describe Nintendo?
Discusses how firms can use the financial markets to hedge these risks externally, including more complex external hedging techniques such as futures and swaps.
Explains how firms can manage these risks by adopting hedging techniques internal to the firm’s operations.
Examines the three forms of currency risk: translation risk, transaction risk and economic risk.
Explains the economic theory underlying the operation of international financial markets.
As a defence against a possible takeover bid, the managing director proposes that Woppit make a bid for Grapper plc, in order to increase Woppit’s size and, hence, make a bid for Woppit more
Europium plc is a large conglomerate which is seeking to acquire other companies. The Business Development division of Europium plc has recently identified an engineering company – Promithium plc
The directors of Fama Industries plc are currently considering the acquisition of Beaver plc as part of its expansion programme. Fama Industries plc has interests in machine tools and light
Larkin Conglomerates plc owns a subsidiary company, Hughes Ltd, which sells office equipment. Recently, Larkin Conglomerates plc has been reconsidering its future strategy and has decided that Hughes
Dangara plc is contemplating a takeover bid for another quoted company, Tefor plc. Both companies are in the leisure sector, operating a string of hotels, restaurants and motorway service stations.
The directors of Pochettino plc have made an 850p-per-share cash bid for Kain plc, a company that is in a similar line of business. The summarised accounts of these two companies are as
As treasurer of Holiday Ltd, you are investigating the possible acquisition of Leisure Ltd. You have the following basic data:Holiday Leisure Earnings per share (expected next year) £5 £1.50
Is there an exit strategy?
What is an appropriate price?
Will assets require replacement? What are the investment and financing needs?
Is it the assets or the shares of the company that are to be purchased?
What are the motives for the group selling and the management team buying? If the business is currently a loss-maker, how will the new company turn it round? A convincing business plan with detailed
Has the management team got the right blend of skill, experience and commitment?The financial backers may require changes in personnel, frequently the introduction of a finance director.
Suggest reasons why a firm may choose to divest part of its business.
What are the main causes of ‘failure’ of takeovers?
What are the key elements of an acquisition strategy?
Predator is valued on the market at £1,000 million, and Prey at £200 million. Predator values the expected post-merger synergies at £50 million. If it bids £230 million for Prey, what is the NPV
Why might the shareholders of a target company prefer to be paid in cash rather than shares?
Suggest how managerial pay schemes might encourage takeovers against the interests of shareholders.
Suggest some ‘managerial’ motives for growth by takeover.
How private equity-based investment houses operate in the acquisition and re-structuring process
How corporate re-structuring can enhance shareholder value.
How the degree of success of a takeover can be evaluated.
How acquisitions should be integrated.
How acquisitions can be financed.
Why firms select acquisitions rather than other strategic options.
Lancelot plc is a diversified company with three operating divisions – North, South and West. The operating characteristics of North are 50 per cent more risky than South, while West is 25 per cent
Megacorp plc, an all-equity-financed multinational, is contemplating expansion into an overseas market. It is considering whether to invest directly in the country concerned by building a greenfield
Salas Ltd is an unquoted company that operates four divisions, all focused on single activities as shown in the following table. Salas identifies a proxy quoted company for each activity in order to
The all-equity-financed Lasar plc has a Beta of 0.8. What rate of return should it seek on new investment:(i) with similar risk to existing activities?(ii) with 25 per cent greater systematic risk
Mack plc has paid out dividends per share over the past few years, as follows:2014 11.0p 2015 12.5p 2016 14.0p 2017 17.0p 2018 20.0p In March 2018, the market price per share of Mack is £5.00
Insert the missing values in the following table:ke P0 g D0(i) 11% £8.00 3% ?(ii) 14% ? 4% £0.350(iii) ? £5.00 6% £0.155(iv) 12% £4.60 ? £0.250
The ordinary shares of Rasal plc have a market price of £10.50, following a recent dividend payment of £0.80 per share. Dividend growth has averaged 4.5 per cent p.a. over the past five years. What
Determine the required return on a project whose revenue sensitivity is 50 per cent and operating gearing 80 per cent compared to the division where it is located. The divisional Beta is 1.2, the
Re-work the Whitbread weighted average Beta calculation, using share of operating profits as weightings (given above).
What is the company Beta for the firm shown in Figure 10.1 if activities A and B constitute 65 per cent and 35 per cent of its assets, respectively?
Specify the two situations under which the DGM breaks down completely. (You may have to revisit Chapter 3.)
Determine the required return by shareholders in the following case:Share price = £1.80 (ex div)Past growth = 3%EPS = £0.36 Dividend cover = 3 times
Appreciate how taxation may influence discount rates.
Be aware of the practical difficulties in specifying discount rates for particular activities.
Appreciate that different rates of return may be required at different levels of a firm.
Be able to apply the required rate of return to firm valuation.
Understand how the Capital Asset Pricing Model also can be used for this purpose.
Understand how the Dividend Growth Model can be used to set the hurdle rate.
Z plc is a long-established company with interests mainly in retailing and property development. Its current market capitalisation is £750 million. The company trades exclusively in the United
The following figures relate to monthly observations of the percentage return on a widely used stock market index(Rm) and the return on a particular ordinary share (Rj) over a period of six
The market portfolio has yielded 12 per cent on average over past years. It is expected to offer a risk premium in future years of 7 per cent. The standard deviation of its return is 8 per cent. The
Which of the following shares are over-valued?Beta Current rate of return A 0.7 7%B 1.3 13%C 0.9 9%The risk-free rate is 5 per cent, and the return on the market index is 10 per cent.
Locate the security market line (SML) given the following information: Rf = 8,, ERm = 12,.
Supply the missing links in the table:ERj Rf B ERm(i)(ii)(iii)(iv)19%17%?15%?5%4%7%1.10?0.75 0.65 18%12%10%?
The ordinary shares of Paddy plc have a Beta of 1.23. The risk-free rate of interest is 5 per cent, and the risk premium achieved on the market index over the past 20 years has averaged 11.5 per cent
What reasons may there be for a conglomerate discount existing?
You expect the stock market to rise in the next year or so. Could you beat the market portfolio by holding, say, the five securities with the highest Betas?
What is the implied discount rate for investment by GKN into food retailing?
As explained, the SML is an equilibrium relationship that traces out the set of required returns for securities of different levels of risk which an efficient capital market would demand. How would

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