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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

To understand how uncertainty affects investment decisions.
To explore managers’ risk attitudes.
To appreciate the levels at which risk can be viewed.
To be able to measure the expected NPV and its variability.
To appreciate the main risk-handling techniques and apply them to capital budgeting problems.
To understand the various forms of real options that can further enhance a project’s value.
Why is risk assessment important in making capital investment decisions?
Which type of risk do the following describe?1 Risks associated with increasing the firm’s level of borrowing.2 The variability in the firm’s operating profits.3 Variability in the cash flows of
Project X has an expected return of £2,000 and a standard deviation of £400. Project Y has an expected return of £1,000 and a standard deviation of £400. Which project is more risky?
What do you understand by the following?(a) risk(b) uncertainty(c) risk-aversion(d) expected value(e) standard deviation(f) semi-variance(g) mean–variance rule
What do you understand by Monte Carlo simulation? When might it be useful in capital budgeting?
Explain the importance of risk in capital budgeting.
Explain the distinction between project risk, business risk, financial risk and portfolio risk.
The ‘woodpulp’ project has an initial cost of £13,000 and the firm’s risk-free interest rate is 10 per cent. If certainty equivalents and net cash flows (NCFs) for the project are as in the
Meedas Enterprises has a proposal costing £800. Using a 10 per cent cost of capital, compute the expected NPV, standard deviation and coefficient of variation, assuming independent interperiod cash
Corbyn plc is considering launching a new product involving capital investment of £180,000. The machine has a four-year life and no residual value. Sales volumes of 6,000 units are forecast for each
Plato Pharmaceuticals Ltd has invested £300,000 to date in developing a new type of insect repellent. The repellent is now ready for production and sale, and the marketing director estimates that
The managing director of Tigwood Ltd believes that a market exists for ‘microbooks’. He has proposed that the company should market 100 best-selling books on microfiche, which can be read using a
The general manager of the nationalised postal service of a small country, Zedland, wishes to introduce a new service. This service would offer same-day delivery of letters and parcels posted before
What corporate finance and investment decisions involve.
How financial management has evolved.
The finance function and how it relates to its wider environment and to strategic planning.
The central role of cash in business.
The goal of shareholder wealth creation and how investors can encourage managers to adopt this goal.
Why is the goal of maximising owners’ wealth helpful in analysing capital investment decisions? What other goals should also be considered?
Poldark plc is a young dynamic company which became listed on the stock market three years ago. Its management is very keen to do all it can to maximise shareholder value and, for this reason, has
Discuss the importance and limitations of ESOPs (executive share option plans) to the achievement of goal congruence within an organisation.(ACCA)
The primary financial objective of companies is usually said to be the maximisation of shareholders’ wealth. Discuss whether this objective is realistic in a world where corporate ownership and
(a) The Cleevemoor Water Authority was privatised in 2007, to become Northern Water plc (NW). Apart from political considerations, a major motive for the privatisation was to allow access for NW to
The functions of financial markets.
The operation of the Stock Exchange.
The extent to which capital markets are efficient.
How taxation affects corporate finance.
When a company seeks a listing for its shares on a stock exchange, it usually recruits the assistance of an investment bank.(a) Explain the role of an investment bank in a listing operation with
(a) Briefly outline the major functions performed by the capital market and explain the importance of each function for corporate financial management. How does the existence of a well-functioning
Beta plc has been trading for 12 years and during this period has achieved a good profit record. To date, the company has not been listed on a recognised stock exchange. However, Beta plc has
Collingham plc produces electronic measuring instruments for medical research. It has recorded strong and consistent growth during the past 10 years since its present team of managers bought it out
The time-value of money.
The financial arithmetic underlying compound interest and discounting.
Present value formulae for single amounts, annuities and perpetuities.
The valuation of bonds and shares.
Explain the difference between accounting profit and cash flow.
Calculate the present value of a 10-year annuity of £100, assuming an interest rate of 20 per cent.
A firm is considering the purchase of a machine which will cost £20,000. It is estimated that annual savings of£5,000 will result from the machine’s installation, that the life of the machine
Brymo Ltd issued bonds two years ago that pay interest on an annual basis at 8 per cent. The bonds are due for repayment in two years’ time. They will be redeemed at £110 per £100 nominal value.
Brosnan plc generates cash flows of £5 million p.a. after allowing for tax and depreciation, which is used for reinvestment. It has issued 10 million shares. Shareholders require a 12 per cent
Insert the missing values in the following table:P0 D0 D1 g b R ke(i) £8.44 £0.35 ? 8.5% 0.5 17% 13.0%(ii) £4.98 £0.20 £0.219 ? 0.6 16% 14.0%(iii) ? £0.10 £0.108 8.0% 0.4 20% 15.0%(iv) £2.75
Over the coming year Chance Manufacturing's stock price will halve to $50 from its current level of $100, or it will rise to $200. The 1-year interest rate is 10%.a. What is the delta of a 1-year
1. How would you describe Sunset Boards’s cash flows for 2018? Write a brief discussion.2. In light of your discussion in the previous question, what do you think about Tad’s expansion
The Canadian government is encouraging saving for post-secondary education through registered education savings plans (RESPs) and the Canada Education Savings Grant. Under current rules, the total
Do you think all stock exchanges trade stocks? Check out the Hollywood Stock Exchange on www.hsx.com. Buy shares in your favourite actors, movies, and music artists and watch their values rise or
Go to www.rnsn.com/en-ca/money to get data to update each firm's information in Table 7.4. Type each firm name in the "Name or Symbol" box and click on "Go.• Record the previous close stock price
Visit GE Capital's Asset Seller Web site, www.geasset.com to see off-lease assets for sale. Pick 2 asset categories, select 5 items, and compare the average asking prices.
The site www.canadabusiness.ca/eng/125 is designed to help people plan the successful start oftheir own business. Check into each ofthe 10 topics. The one most related to this chapter is "Business
Industries differ substantially in the 24. amount of working capital that they need to hold. Which industries would you expect to involve large investments in working capital? Which would involve
Banks allow you to pay your bills over the Internet. You log on to your account to tell the bank which payments it should send out on your behalf. Most banks allow you to connect to epost, Canada
The application of option pricing models to real options is a rapidly expanding field of finance. Although the details are beyond this textbook in scope, check out the visual discussion of real
The International Finance Risk Institute provides three case studies on the sources, types, and control of financial risk at riskinstitute.ch/introduction.htm. Read the Sumitomo story for insights
Risk management extends beyond using financial instruments to hedge. This Web site offers ideas on how to manage a business crisis:
Algorithmics is a world leader in risk management systems and a Canadian company. Go to www.algorithmics.com/EN/careers. Click on "Worldwide Opportunities" and read a couple of job descriptions.
Go to the Industry Center of Yahoo Finance Web site at biz.yahoo.com/ic/ind_index.html. The "Processed & Packaged Goods" industry is made up of companies that buy commodities and package and/or
Given that Endo International was down by 73 percent for 2016, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Go to www.sedar.com, the Web site where public Canadian companies must post their annual reports and other corporate documents. Click on ·search Database," then •Public Company." Select document
You want to find the expected return for Bank of Montreal using the CAPM. First you need the market risk premium. Go to bmonesbittburns.com/economics/, and find “Daily Economic Update” under
Refer again to the balance sheet and income statement for Abercrombie Supply Company for the fiscal year ended June 30, 2017. Use the DuPont equation to calculate the return on equity (ROE). In the
You are a senior financial analyst with General Motors in their capital budgeting division. GM is considering expanding in Thailand due to its positive business atmosphere and low corporate tax
Suppose an H1200 supercomputer has a cost of $100,000 and will have a residual market value of $30,000 in four years. The risk-free interest rate is 5.6% APR with monthly compounding.a. What is the
Consider a six-year lease for a $450,000 bottling machine, with a residual market value of$135,000 at the end of the six years. If the risk-free interest rate is 5.5% APR with monthly compounding,
Acme Distribution currently has the following items on its balance sheet:Assets Liabilities Cash 20 Debt 70 Property, Plant, and Equipment 175 Equity 125 Under current FASB accounting standards (that
Your firm is considering leasing a $49,000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9.4% APR with monthly compounding.Classify each
Riverton Mining plans to purchase or lease $285,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be
Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2.02 million in net working capital today. The plant will
The Greek Connection had sales of $30.3 million in 2018, and a cost of goods sold of$12.1 million. A simplified balance sheet for the firm appears below:Assets THE GREEK CONNECTION Balance Sheet As
The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide.The owner of the firm is investigating the benefit of employing a billing firm to do her billing and
The Manana Corporation had sales of $69 million this year. Its accounts receivable balance averaged $7 million. How long, on average, does it take the firm to collect on its sales?
The Mighty Power Tool Company has the following accounts on its books:Customer Amount Owed ($) Age (days)ABC 49,000 35 DEF 32,000 4 GHI 10,000 10 KLM 78,000 23 NOP 43,000 40 QRS 14,000 14 TUV
Use the financial statements supplied on the next page for International Motor Corporation( IMC) to answer the following questions.a. Calculate the cash conversion cycle for IMC for both 2018 and
Ohio Valley Homecare Suppliers, Inc. (OVHS) had $17 million in sales in 2018. Its cost of goods sold was $6.8 million, and its average inventory balance was $1.7 million.a. Calculate the average
You are the Chief Financial Officer (CFO) of Companhia Siderúrgica Nacional (CSN). This afternoon you played tennis with a member of the company’s board of directors. Sometime during a break, the
Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment.The following table contains financial forecasts as well as current (month 0) working capital levels.
Quarterly working capital levels for your firm for the next year are included in the following table. What are the permanent working capital needs of your company? What are the temporary
Consider two loans with a one-year maturity and identical face values: a 7.5% loan with a 1.02%loan origination fee and a 7.5% loan with a 5.4% (no-interest) compensating balance requirement.Which
The Needy Corporation borrowed $13,000 from Bank Ease. According to the terms of the loan, Needy must pay the bank $592 in interest every three months for the three-year life of the loan, with the
The Treadwater Bank wants to raise $1.2 million using three-month commercial paper. The net proceeds to the bank will be $1,178,400. What is the effective annual rate of this financing for Treadwater?
The Signet Corporation has issued four-month commercial paper with a $6.2 million face value.The firm netted $6,038,676 on the sale. What effective annual rate is Signet paying for these funds?
You are invested in GreenFrame, Inc. The CEO owns 2% of GreenFrame and is considering an acquisition. If the acquisition destroys $53 million of GreenFrame’s value, but the present value of the
Loki, Inc., and Thor, Inc., have entered into a stock swap merger agreement whereby Loki will pay a 20% premium over Thor’s premerger price. If Thor’s premerger price per share was $42 and
The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $16 per share and LE is trading for $14 per share, implying a premerger value of LE of approximately$5.7 billion.
ABC has 1 million shares outstanding, each of which has a price of $16. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of$2.53. Assume
What is a say-on-pay vote?
Are the rights of shareholders better protected in the United States or in France?
The William Companies ( WMB) owns and operates natural gas pipelines that deliver 12%of the natural gas consumed in the United States. WMB is concerned that a major hurricane could disrupt its
Your utility company will need to buy 125,000 barrels of oil in 10 days’ time, and it is worried about fuel costs. Suppose you go long 125 oil futures contracts, each for 1000 barrels of oil, at
Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $117,000 in three months’ time when the
Suppose the current exchange rate is $1.78/£, the interest rate in the United States is 5.37%, the interest rate in the United Kingdom is 3.92%, and the volatility of the $/£ exchange rate is 9.8%.
You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s balance sheet is as follows (in millions of dollars):Assets Liabilities Cash Reserves 51.6 Checking and Savings
The Citrix Fund has invested in a portfolio of government bonds that has a current market value of $44.8 million. The duration of this portfolio of bonds is 13.5 years. The fund has borrowed to
Your firm needs to raise $105.9 million in funds. You can borrow short term at a spread of 1%over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.46% over 10-year
You are a U.S. investor who is trying to calculate the present value of a ;14 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.205/; and the forward rate
Etemadi Amalgamated, the U.S. manufacturing company in Problem 3, is still considering a new project in the euro area. All information presented in Problem 3 is still accurate, except the spot rate

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