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fundamentals of corporate finance 10th

Questions and Answers of Fundamentals Of Corporate Finance 10th

Calculating the Cash Budget Wildcat SA has estimated sales (in millions) for the next four quarters as follows:Q1 Q2 Q3 Q4 Sales €230 €195 €270 €290 Sales for the first quarter of the year
Which credit policy should the company use?
Also, notice that in option 3 the default rate and administrative costs are below those in option 2.Is this plausible? Why or why not?
Why is venture capital often provided in stages?
What are the basic procedures in selling a new issue?
What is the difference between a rights offer and a cash offer?
Why is an initial public offering necessarily a cash offer?
What do underwriters do?
What is the Green Shoe provision?
Why is underpricing a cost to the issuing firm?
Suppose a stockbroker calls you up out of the blue and offers to sell you ‘all the shares you want’ of a new issue. Do you think the issue will be more or less underpriced than average?
What are some possible reasons why the share price drops on the announcement of a new equity issue?
Explain why we might expect a firm with a positive-NPV investment to finance it with debt instead of equity.
What are the different costs associated with security offerings?
What lessons do we learn from studying issue costs?
How does a rights issue work?
What questions must financial managers answer in a rights issue?
How is the value of a right determined?
When does a rights issue affect the value of a company’s shares?
Does a rights issue cause share prices to decrease? How are existing shareholders affected by a rights offering?
What are the different kinds of dilution?
Is dilution important?
What is the difference between private and public bond issues?
A private placement is likely to have a higher interest rate than a public issue. Why?
Flotation Costs L5 plc is considering an equity issue to finance a new space station. A total of €15 million in new equity is needed. If the direct costs are estimated at 7 per cent of the amount
Rights Issues Hadron SA currently has 3 million shares outstanding. The equity sells for €40 per share. To raise €20 million for a new particle accelerator, the firm is considering a rights
Long-Term Financing New equity issues are generally only a small portion of all new issues. At the same time, companies continue to issue new debt. Why do companies tend to issue little new equity
Rights Issues Again plc is proposing a rights offering.Currently there are 350,000 shares outstanding at £85 each. There will be 70,000 new shares offered at £70 each.(a) What is the new market
Venture Capital What is the difference between venture capital financing and other forms of external financing?What factors influence a firm’s choices of venture capital financing versus other
Rights Issues Faff plc has announced a rights issue to raise £50 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
IPO Underpricing Carlyle plc and Mullan plc have both announced IPOs at £40 per share. One of these is undervalued by £11, and the other is overvalued by £6, but you have no way of knowing which
Calculating Flotation Costs Educated Horses plc needs to raise £60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise
Calculating Flotation Costs In the previous problem, if the stock exchange filing fee and associated administrative expenses of the offering are £900,000, the offer price is £21 per share and the
Calculating Flotation Costs Groene Heuvels NV has just gone public. Under a firm commitment agreement, Groene Heuvels received €19.75 for each of the 5 million shares sold. The initial offering
Price Dilution Raggio SpA has 100,000 shares of equity outstanding. Each share is worth €90, so the company’s market value of equity is €9,000,000. Suppose the firm issues 20,000 new shares at
Rights Hoobastink Manufacturing is considering a rights offer. The company has determined that the exrights price would be €52. The current price is €55 per share, and there are 5 million shares
Value of a Right Show that the value of a right just prior to expiration can be written as where PRO, PS and PX stand for the rights-on price, the subscription price and the ex-rights price,
Selling Rights Wuttke plc wants to raise £3.65 million via a rights issue. The company currently has 490,000 ordinary shares outstanding that sell for £30 per share. Its underwriter has set a
Valuing a Right Mitsi Inventory Systems has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of €40. At
Equity Finance In a public share issue, the probability of receiving an allocation of an underpriced security is less than or equal to the probability of receiving an allocation of an overpriced
At the end of the discussion Dan asks Robin about the Dutch auction IPO process. What are the differences in the expenses to West Coast Yachts if it uses a Dutch auction IPO compared with a
During the discussion of the potential IPO and West Coast Yachts’future, Dan states that he feels the company should raise £50 million. However, Larissa points out that if the company needs more
After deliberation, Larissa and Dan have decided that the company should use a firm commitment offering, with Crowe & Mallard as the lead underwriter. The IPO will be for £60 million. Ignoring
Many of the employees of West Coast Yachts have shares of equity in the company because of an existing employee stock purchase plan. To sell the equity, the employees can tender their shares to be
What do we mean by the future value of an investment?
What does it mean to compound interest? How does compound interest differ from simple interest?
In general, what is the future value of €1 invested at r per period for t periods?
What do we mean by the present value of an investment?
The process of discounting a future amount back to the present is the opposite of doing what?
What do we mean by discounted cash flow, or DCF, valuation?
In general, what is the present value of £1 to be received in t periods, assuming a discount rate of r per period?
What is the basic present value equation?
Calculating Future Values Assume you deposit 10,000 Swedish kronor today in an account that pays 6 per cent interest. How much will you have in 5 years?
Calculating Present Values Suppose you have just celebrated your 19th birthday. A rich uncle has set up a trust fund for you that will pay you £150,000 when you turn 30. If the relevant discount
Calculating Rates of Return You’ve been offered an investment that will double your money in 10 years.What rate of return are you being offered? Check your answer using the Rule of 72.
Calculating the Number of Periods You’ve been offered an investment that will pay you 9 per cent per year. If you invest £15,000, how long until you have £30,000? How long until you have £45,000?
Simple Interest versus Compound Interest First City Bank pays 8 per cent simple interest on its savings account balances, whereas Second City Bank pays 8 per cent interest compounded annually. If you
Calculating Future Values Calculate the future value of a £100 cash flow for the following combinations of rates and times.1. r = 8% and t = 10 years.2. r = 8% and t = 20 years.3. r = 4% and t = 10
Calculating Present Values Calculate the present value of a £100 cash flow for the following combinations of rates and times.1. r = 8% and t = 10 years.2. r = 8% and t = 20 years.3. r = 4% and t =
Calculating Interest Rates Solve for the unknown interest rate in each of the following.Present value Years Future value Interest rate (%)£240 3 £297£360 11 £1,080£39,000 12 £185,382£38,261 50
Calculating the Number of Periods Solve for the unknown number of years in each of the following.Present value(£)Interest rate(%)Future value Years NKr 560 10 NKr 1,284 NKr 810 7 NKr 4,341 NKr
Calculating Interest Rates Assume the total cost of a university education will be €290,000 when your child enters college in 18 years. You presently have €40,000 to invest. What annual rate of
Calculating the Number of Periods At 6 per cent interest, how long does it take to double your money? To quadruple it?
Calculating Interest Rates In 2017, the average price per metre for owner-occupied flats in Copenhagen was about 23,000 Danish kroner. In 1998 the average price was around 6,000 Danish kroner. What
Calculating Present Values Imprudential plc has an unfunded pension liability of £800 million that must be paid in 20 years. To assess the value of the firm’s equity, financial analysts want to
Calculating Present Values You have just received notification that you have won the €1 million first prize in the Euro Lottery. However, the prize will be awarded on your 100th birthday (assuming
Calculating Future Values Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth
Calculating Interest Rates and Future Values In 1968 prize money for the Wimbledon Tennis Championships was first awarded. For the winner of the men’s singles it was £2,000 and for the ladies’
Calculating Interest Rates In 2017 a gold Morgan dollar minted in 1895 sold for $28,786. For this to have been true, what rate of return did this coin return for the lucky numismatist? Assume
Calculating Rates of Return Consider again the security issue by Spanish Word Ltd that in return for receiving £24,099 today from investors, they will pay back £100,000 in 30 years.(a) Based on the
Calculating Present Values Suppose you are still committed to owning a €170,000 Ferrari (see Problem 4.9). If you believe your mutual fund can achieve a 12 per cent annual rate of return and you
Calculating Future Values You have just made your first £4,000 contribution to your retirement account.Assuming you earn a 10 per cent rate of return and make no additional contributions, what will
Calculating Future Values You are scheduled to receive £30,000 in two years. When you receive it, you will invest it for 6 more years at 8.4 per cent per year.How much will you have in 8 years?
Calculating the Number of Periods You expect to receive €10,000 at graduation in 2 years. You plan on investing it at 10 per cent until you have €75,000. How long will you have to wait from now?
Interest You receive a credit card application from Shady Banks plc offering an introductory rate of 1.90 per cent per year, compounded monthly for the first 6 months, increasing thereafter to 16 per
Future Values Your job pays you only once a year for all the work you did over the previous 12 months. Today, 31 December, you just received your salary of £100,000, and plan to spend all of it.
Present Values A 3-year annuity of six £5,000 semiannual payments will begin 10 years from now, with the first payment coming 10.5 years from now. If the discount rate is 10 per cent compounded
What are the relevant incremental cash flows for project evaluation?
What is the stand-alone principle?
What is a sunk cost? An opportunity cost?
Explain what erosion is, and why it is relevant.
Explain why interest paid is not a relevant cash flow for project evaluation.
What is the definition of project operating cash flow? How does this differ from net income?
For the shark attractant project, why did we add back the firm’s net working capital investment in the final year?
Why is it important to consider changes in net working capital in developing cash flow? What is the effect of doing so?
How is depreciation calculated for non-current assets under current tax law? What effects do expected salvage value and estimated economic life have on the calculated depreciation deduction?
What are the top-down and bottom-up definitions of operating cash flow?
In setting a bid price, we used a zero NPV as our benchmark. Explain why this is appropriate.
Under what circumstances do we have to worry about unequal economic lives? How do you interpret the EAC?
Capital Budgeting for Project X Based on the following information for project X, should we undertake the venture? To answer, first prepare a pro forma income statement for each year. Next calculate
Calculating Operating Cash Flow Kilimanjaro Tents Ltd have projected a sales volume of R1,650 for the second year of a proposed expansion project. Costs normally run at 60 per cent of sales, or about
Spending Money to Save Money? For help on this one, refer back to the computerized inventory management system in Example 9.3. Here, we’re contemplating a new automatic surveillance system to
Relevant Cash Flows Parker & Stone NV is looking at setting up a new manufacturing plant in Rotterdam to produce garden tools. The company bought some land 6 years ago for €6 million in
Relevant Cash Flows Winnebagel plc currently sells 30,000 mobile caravans per year at £53,000 each, and 12,000 luxury stationary caravans per year at £91,000 each. The company wants to introduce a
Calculating Projected Net Income A proposed new investment has projected sales of £830,000. Variable costs are 60 per cent of sales, and fixed costs are £181,000;depreciation is £77,000. Prepare a
Calculating OCF Consider the following income statement:Sales (£) 1,824,500 Costs (£) 838,900 Depreciation (£) 226,500 Profit before taxes (£)?Taxes (28%) (£) ?Net income (£) ?Fill in the
OCF from Several Approaches A proposed new project has projected sales of NKr108,000, costs of NKr51,000, and depreciation of NKr6,800. The tax rate is 35 per cent.Calculate operating cash flow using
Calculating Depreciation A piece of newly purchased industrial equipment costs €1,080,000, and is depreciated using 20 per cent reducing-balance. Calculate the annual depreciation allowances and
Calculating Salvage Value Consider an asset that costs€548,000 and is depreciated using 20 per cent reducingbalance. The asset is to be used in a five-year project; at the end of the project, the
Calculating Salvage Value An asset used in a 4-year project is depreciated at 20 per cent reducing balance for tax purposes. The asset has an acquisition cost of£9,300,000 and will be sold for

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