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fundamentals of corporate finance 10th

Questions and Answers of Fundamentals Of Corporate Finance 10th

Using Exchange Rates Take a look back at Table 18.2 to answer the following questions:(a) If you have 100 Bahamian dollars, how many British pounds can you get? How many euros can you get?(b) How
Using the Cross-Rate Use the information in Table 18.2 to answer the following questions:(a) Which would you rather have, €100 or £100 Why?(b) Which would you rather have, 100 Bulgarian lev or 100
Forward Exchange Rates If the $/€ spot rate is $1.14/€ and three-month forward rate is $1.15/€? Is the dollar selling at a premium or a discount? Explain.
Using Spot and Forward Exchange Rates Suppose the spot exchange rate for the South African rand is R15/£ and the sixmonth forward rate is R16/£.(a) Which is worth more, the British pound or the
Cross-Rates and Arbitrage Use Table 18.2 to answer the following questions:(a) What is the cross-rate in terms of Bangladeshi taka per Burundian franc?(b) Suppose the cross-rate is 15 Burundian
Interest Rate Parity The £/€ exchange rate is £0.7635/€ and the one-year forward rate is €0.76/£. Suppose interest rate parity holds, and the current one-year risk-free rate in the Eurozone
Interest Rates and Arbitrage The treasurer of a major British firm has £30 million to invest for 3 months. The annual interest rate in the United Kingdom is 0.45 per cent per month.The interest rate
Inflation and Exchange Rates Suppose the current exchange rate for the Polish zloty is Z5/£. The expected exchange rate in 3 years is Z5.2/£. What is the difference in the annual inflation rates
Exchange Rate Risk Suppose your company, which is based in Nantes, imports computer motherboards from Singapore.The exchange rate is S$1.9361/€1. You have just placed an order for 30,000
Exchange Rates and Arbitrage 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 percent and it is 8 per
The International Fisher Effect You observe that the inflation rate in the United Kingdom is 3.5 per cent per year, and that T-bills currently yield 3.9 per cent annually. What do you estimate the
Spot versus Forward Rates Suppose the spot and threemonth forward rates for the Indian rupee are R68.81/€ and R61.8/€, respectively.(a) Is the rupee expected to get stronger or weaker?(b) What
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
Capital Budgeting The Dutch firm ABS Equipment has an investment opportunity in the United Kingdom. The project costs £12 million, and is expected to produce cash flows of£2.7 million in year 1,
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
Translation Exposure Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 23,000 solaris, debt in the amount of 9,000 solaris, and
Translation Exposure In the previous problem, assume the equity increases by 1,250 solaris as a result of retained earnings. If the exchange rate at the end of the year is 1.24 solaris per euro, what
Using the Exact International Fisher Effect From our discussion of the Fisher effect in Chapter 6, we know that the actual relationship between a nominal rate R, a real rate r and an inflation rate h
Capital Budgeting Stolt-Neilsen Ltd is a Norwegian maritime transportation company with operations all over the world. Piracy is becoming an increasingly worrying problem for firms like Stolt-Neilsen
What are the pros and cons of the international sales plan? What additional risks will the company face?
What will happen to the company’s profits if the British pound strengthens? What if the British pound weakens?
Ignoring taxes, what are West Coast Yacht’s 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
How can the company hedge its exchange rate risk? What are the implications for this approach?
Taking all factors into account, should the company pursue international sales further? Why or why not?
What are the different types of cash dividend?
What are the mechanics of the cash dividend payment?
How should the share price change when it goes ex dividend?
How can an investor create a homemade dividend?
Are dividends irrelevant?
What are the tax benefits of low dividends?
Why do flotation costs favour a low payout?
Why might some individual investors favour a highdividend payout?
Why might some non-individual investors prefer a high dividend payout?
How does the market react to unexpected dividend changes?What does this tell us about dividends? About dividend policy?
What is a dividend clientele? All things considered, would you expect a risky firm with significant but highly uncertain growth prospects to have a low- or high-dividend payout?
Why might a share repurchase make more sense than an extra cash dividend?
What is the effect of a share repurchase on a firm’s EPS? On its P/E?
What is the effect of a stock split on shareholder wealth?
How does the accounting treatment of a stock split differ from that used with a stock dividend?
Eurasion Natural Resources Corporation currently has 2.4 million shares outstanding that sell for £5.16 per share. Assuming no market imperfections or tax effects exist, what will the share price be
Dividends and Taxes Thesepe plc has declared a £2 pershare dividend and sells for £8.40 per share. Assuming that the tax rate on capital gains and dividends is zero, what do you think the
Stock Dividends The shareholder equity accounts for Hexagon International are shown here:(a) If Hexagon shares currently sell for £25 per share, and a 10 per cent stock dividend is declared, how
Stock Splits For the company in Problem 16.2, show how the equity accounts will change if:(a) Hexagon declares a four-for-one stock split. How many shares are outstanding now? What is the new par
Dividend Policy 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 potential
Stock Splits and Stock Dividends Eurasion Natural Resources Corporation currently has 2.4 million shares outstanding that sell for £5.16 per share. Assume no market imperfections or tax effects
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?
Regular Dividends The balance sheet for Severn Trent plc is shown here in market value terms. There are 2.4 billion shares outstanding. The company has declared a dividend of £0.4 per share. The
Share Repurchase The balance sheet for Severn Trent plc is shown here in market value terms. There are 2.4 billion shares outstanding. The company declared a dividend of £0.61 per share. The equity
Stock Dividends The market value balance sheet for KL Air is shown here. KL Air has declared a 20 per cent stock dividend. The stock goes ex-dividend tomorrow (the chronology for a stock dividend is
Stock Dividends The company with the equity accounts shown here has declared a 12 per cent stock dividend when the market value of its equity is €20 per share. What effects on the equity accounts
Stock Splits In the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 70 pence per share cash dividend on the new (postsplit) shares represents an
Homemade Dividends You own 2,000 shares of equity in Avondale Property plc. You will receive a £0.25 per share dividend in 1 year. In 2 years, Avondale will pay a liquidating dividend of £0.75 per
Homemade Dividends In the previous problem, suppose you want only £400 total in dividends the first year. What will your homemade dividend be in 2 years?
Share Repurchase Flychucker SA is evaluating an extra dividend versus a share repurchase. In either case €5,000 would be spent. Current earnings are €0.95 per share, and the equity currently
Expected Return, Dividends and Taxes Gecko Company and Gordon Company are two firms whose business risk is the same but which have different dividend policies. Gecko pays no dividend, whereas Gordon
Dividends and Taxes In the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the equity goes ex dividend. Once we
Residual Dividend Policy Worthington AG has declared an annual dividend of 1.50 Swiss Francs (SFr) per share.For the year just ended, earnings were SFr14 per share.What is Worthington’s payout
Dividends versus Reinvestment National Business Machine plc (NBM) has £2 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest
Dividends versus Reinvestment After completing its capital spending for the year, Carlson Manufacturing has£1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury
Georges believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the share price? How will it affect the value of the company?
Louis-Lucent believes that the company should use the extra cash to pay off debt, and upgrade and expand its existing manufacturing capability. How would Louis-Lucent’s proposals affect the company?
Katherine is in favour of a share repurchase. She argues that a repurchase will increase the company’s P/E ratio, return on assets, and return on equity. Are her arguments correct? How will a share
Another option discussed by Georges, Louis-Lucent and Katherine would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?
One way to value a share of equity is the dividend growth, or growing perpetuity, model. Consider the following. The dividend payout ratio is 1 minusb, where b is the ‘retention’ or
Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or as a partnership?
What is the transaction motive, and how does it lead firms to hold cash?
What is the cost to the firm of holding excess cash?
What are some reasons why firms find themselves with idle cash?
What is a target cash balance?
What is the basic trade-off in the BAT model?
What are the basic components of credit policy?
What considerations enter the determination of the terms of sale?
Explain what terms of ‘3/45, net 90’ mean. What is the effective interest rate?
What are the important effects to consider in a decision to offer credit?
Explain how to estimate the NPV of a credit policy switch.
What are the carrying costs of granting credit?
What are the opportunity costs of not granting credit?
What is credit analysis?
Should credit always be given?
What tools can a manager use to monitor receivables?
What is an ageing schedule?
What are the different types of inventory?
Which cost component of the EOQ model does JIT inventory minimize?
The BAT Model Given the following information, calculate the target cash balance using the BAT model:Annual interest rate 12%Fixed order cost€100 Total cash needed€240,000 What are the
Credit Policy Cold Fusion plc (manufacturer of the Mr Fusion home power plant) is considering a new credit policy. The current policy is cash only. The new policy would involve extending credit for
Credit Where Credit Is Due You are trying to decide whether or not to extend credit to a particular customer. Your variable cost is €15 per unit; the selling price is €22. This customer wants to
The EOQ Annondale Manufacturing starts each period with 10,000 ‘Long John’ golf clubs in stock. This stock is depleted each month and reordered. If the carrying cost per golf club is £1, and the
Calculating Float In a typical month, Jeremy Ltd receives 80 cheques totalling £156,000. These are delayed 4 days on average. What is the average daily float? Assume 30 days in the month.
Calculating Net Float Each business day, on average, a company writes cheques totalling €125,000 to pay its suppliers. The usual clearing time for the cheques is 3 days. Meanwhile, the company is
Using Weighted Average Delay A mail-order firm processes 50,000 cheques per month. Of these, 34 per cent are for €20 and 66 per cent are for €30. The €20 cheques are delayed 2 days on average;
Value of Delay Vedant plc disburses cheques every 2 weeks that average £370,000 and take 7 days to clear.How much interest can the company earn annually if it delays transfer of funds from an
Cash Discounts You place an order for 200 units of inventory at a unit price of £95. The supplier offers terms of 2/10, net 30.(a) How long do you have to pay before the account is overdue? If you
ACP and Trade Receivables Dalglish plc sells earnings forecasts for British securities. Its credit terms are 2/10, net 30.Based on experience, 65 per cent of all customers will take the discount.(a)
Terms of Sale A firm offers terms of 2/9, net 40.What effective annual interest rate does the firm earn when a customer does not take the discount?(a) All other things remaining the same, if the
Size of Trade Receivables Baker Ginger Ltd sells on credit terms of net 25.Its accounts are, on average, 9 days past due. If annual credit sales are £8 million, what is the company’s balance sheet
Evaluating Credit Policy Silicon Wafers plc (SW), is debating whether to extend credit to a particular customer.SW’s products, primarily used in the manufacture of semiconductors, currently sell
Credit Policy Evaluation Harrington plc is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine whether Harrington should
Credit Policy Evaluation Consider the information in the following table about two alternative credit strategies.The higher cost per unit reflects the expense associated with credit orders, and the
Safety Stocks and Order Points Saché SA expects to sell 700 of its designer suits every week.The store is open 7 days a week, and expects to sell the same number of suits every day. The company has
Cash Budgeting The sales budget for your company in the coming year is based on a 20 per cent quarterly growth rate with the first-quarter sales projection at £100 million.In addition to this basic

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