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business
fundamentals of corporate finance
Questions and Answers of
Fundamentals Of Corporate Finance
=3. In the graph on page 303, which is the most volatile asset? What motivates investors to enter this market?
=17. You receive €100 000 which you decide to save for your old age. You are now 20. What sort of investment should you go for? Perform the same analysis as if it happened when you were 55 and 80.
=1. Calculate the return on the LVMH share and on the French index over 13 months until April 2017. To help you, you have a record of the share price and of the general index (CAC40). What is the
=3. Calculate the risk and returns of portfolio Z in Section 18.7. What is the proportion of Heineken shares and Criteo shares in this portfolio?
=a. Calculate the expected return and the standard deviation for each of the following portfolios:P1: 100% C; P2: 75% C + 25% D; P3: 50% C + 50% D;P4: 25% C + 75% D; P5: 100% D.
=7. On the graph on page 330, does the Shell share seem underor overvalued to you? What about the Casino share?
=15. Mid-2016 we could see that large food-processing groups(Danone, Nestlé, Unilever) were valued at 16.1 times their expected results. For smaller groups in the same sector (LDC, Savencia,
=20. On a market where no zero-coupon bond is traded, can you determine the two-year interest rate if you know the one-year interest rate and the price of a two-year bond? And then the three-year
=4. Your portfolio has a β of 1.2, the no-risk cash rate is 5.6% and the risk premium is 3%. In this chapter you learned about the APT and were told that the two V factors are growth of GDP and
=your portfolio to GDP growth is −0.4, what is your portfolio’s sensitivity to unanticipated inflation? You believe that a recession is looming and you wish to eliminate your portfolio’s
=6. You are an investor anticipating a decrease in interest rates.Classify, by decreasing order of preference, these bonds:
=a. floating-rate bond to be redeemed (bullet) in 10 years;
=b. floating-rate bond to be redeemed (bullet) in seven years;
=c. perpetuity with fixed rate;
=d. fixed-rate bond to be redeemed (bullet) in five years;
=7. Why was the yield to maturity of easyJet’s bond higher than the nominal rate at issue?
=8. True or false:
=a. if interest rates increase, the price of fixed-rate bonds will fall;
=b. if the nominal rate is higher than the yield to maturity, the bond will trade at less than 100% of face value;
=c. a bond with a high coupon will be worth more than a bond with a low coupon;
=d. the higher the duration, the higher the value of a bond.
=9. Does the investor’s required rate of return for a bond increase with:a. inflation;b. the proportion of debt in the financial structure of the corporate;c. the maturity;d. government bond rates;
=e. the risk of the assets?
=11. True or false:
=a. the higher the duration, the lower the modified duration;
=b. the longer the maturity, the higher the modified duration;
=c. the higher the coupon, the higher the duration.
=1. Butchery Withoutbones issued the following bond:Amount: €125m Issue price: 99.731%Date of issue: 20 February 2017 Settlement date: 20 February 2017 Maturity: 7 years Annual coupon: 5.5%, i.e.
=b. On 21 February 2018, the yield to maturity on bonds comparable to the Butchery Withoutbones bond is 5%.
=Calculate the value, the modified duration and the duration on this date of the Butchery Withoutbones bond.What are your comments compared to previous results?
=c. Did Mineral Waters from Syldavia borrow at a fixed or a variable rate? What were they expecting interest rates to do?
=3. On 21 February 2017, you see the following figures in Leséchos de Moulinsart for Belgian government zero-coupon bonds (which only pay a single coupon with the principal on maturity of a total
=14. Compute the internal rate of return and the modified internal rate of return given a reinvestment rate of 10% for the share in ENS that can be purchased today for 1000:Year 1 2 3 4 5 Cash flow
=25. At what price should you sell Mondass shares in 10 years’ time if the share pays a €1 dividend each year and you require a 6.67% return, knowing that Mondass’s current share price is€15?
=17. What is the present value at 10% of €100 paid annually for three years? The same question for a perpetual income.
=4. How much would €1000 be worth in five years, 10 years and 20 years if invested at 8%? Why is the sum invested for 20 years not double that invested for 10 years?
=2. What is the present value at 10% of €100 received in three years, five years and 10 years? What are the discount factors?
=14. Yes or no?Yes No Provided that investors’ demands are met, companies have access to unlimited funds.The announcement of anticipated losses has an impact on the share price.Manipulating
17. Bankruptcy (S33.4) Explain why equity can sometimes have a positive value even when companies file for bankruptcy.
16. Bankruptcy (S33.4) We described several problems with Chapter 11 bankruptcy. Which of these problems could be mitigated by negotiating a prepackaged bankruptcy?
15. Bankruptcy (S33.4) True or false?a. When a company becomes bankrupt, it is usually in the interests of stockholders to seek a liquidation rather than a reorganization.b. In Chapter 11, a
14. Bankruptcy (S33.4) What is the difference between Chapter 7 and Chapter 11 bankruptcies?
13. Privatization (S33.3) What are the government’s motives in a privatization?
12. Privatization (S33.3) “Privatization appears to bring efficiency gains because public companies are better able to reduce agency costs.” Why do you think this may (or may not) be true?
11. Divestitures (S33.3) Examine some recent examples of divestitures. What do you think were the underlying reasons for them? How did investors react to the news?
10. Restructuring (S33.3) True or false?a. Carve-out or spin-off of a division improves incentives for the division’s managers.b. The announcement of a spin-off is generally followed by a sharp
9. Conglomerates (S33.2) List the disadvantages of traditional U.S. conglomerates. Can private-equity firms overcome these disadvantages?
8. Conglomerates (S33.2) What advantages have been claimed for public conglomerates?
7. Private-equity partnerships (S33.2) We described carried interest as an option. What kind of option? How does this option change incentives in a private-equity partnership? Can you think of
6. Private-equity partnerships (S33.2) Explain the structure of a private-equity partnership.Pay particular attention to incentives and compensation. What types of investment were such partnerships
5. Private-equity partnerships (S33.2) Private-equity partnerships have a limited term. What are the advantages of this arrangement?
4. Leveraged buyouts (S33.1) For what kinds of firm would an LBO or MBO transaction not be productive?
3. Leveraged buyouts (S33.1) Read Barbarians at the Gate (Further Reading). What agency costs can you identify? (Hint: See Chapter 19.) Do you think the LBO was well-designed to reduce these costs?
2. Leveraged buyouts (S33.1) True or false?a. One of the first tasks of an LBO’s financial manager is to pay down debt.b. Once an LBO or MBO goes private, it almost always stays private.c. Many
True or false? Assume a proceeding under Chapter 11 of the U.S. bankruptcy law.a. When a company becomes bankrupt, it is usually in the interests of the equityholders to seek a liquidation rather
20. Merger regulation (S32.6) How do you think mergers should be regulated? For example, what defenses should target companies be allowed to employ? Should managers of target firms be compelled to
19. Takeover tactics (S32.6) Examine a hostile acquisition and discuss the tactics employed by both the predator and the target companies. Do you think that the management of the target firm was
A. Changes in the corporate charter that are designed to deter an unwelcome takeover.B. Measure in which shareholders are issued rights to buy shares if the bidder acquires a large stake in the
18. Merger tactics (S32.6) Connect each term to its correct definition or description.a. Poison pillb. Tender offerc. Shark repellentd. Mergere. Proxy contest
b. A merger in which payment is entirely in the form of voting stock.
17. Taxation (S32.5) Which of the following transactions are not likely to be classed as tax-free?a. An acquisition of assets.
16. Taxation (S32.5) Explain the distinction between a tax-free and a taxable merger. Are there circumstances in which you would expect buyer and seller to agree to a taxable merger?
15. Merger accounting (S32.5) Look again at Table 32.3. Suppose that T Corporation’s fixed assets are reexamined and found to be worth $12 million instead of $9 million. How would this affect the
14. Merger gains and costs (S32.4) Examine a recent merger in which at least part of the payment made to the seller was in the form of stock. Use stock market prices to obtain an estimate of the gain
13. Merger gains and costs (S32.4) Sometimes the stock price of a possible target company rises in anticipation of a merger bid. Explain how this complicates the bidder’s evaluation of the target
12. Merger gains and costs (S32.4) If Winterbourne from Problem 11 has a price-earnings ratio of 12 and Monkton has a P/E ratio of 8, what should be the P/E ratio of the merged firm?Assume in this
11. Merger gains and costs (S32.4) Winterbourne is considering a takeover of Monkton Inc.Winterbourne has 10 million shares outstanding, which sell for $40 each. Monkton has 5 million shares
f. What is the NPV of the merger to Gobi when it uses an exchange of stock? Why does your answer differ from part (a)?
e. Now suppose that the merger takes place through an exchange of stock. On the basis of the premerger prices of the firms, Gobi sells for $50, so instead of paying $20 cash, Gobi issues 0.40 of its
d. What are the percentage gains to the shareholders of each firm?
c. What will Universal sell for?
b. What will Gobi sell for when the market learns that it plans to acquire Universal for $20 a share?
10. Merger gains and costs (S32.4) Gobi Desserts is bidding to take over Universal Puddings.Gobi has 3,000 shares outstanding, selling at $50 per share. Universal has 2,000 shares outstanding,
e. How would the cost of the share offer change if the expected growth rate was not changed by the merger?
d. How would the cost of the cash offer change if the expected growth rate of Corton was not changed by the merger?
c. What is the cost of the acquisition if Corton offers one share of Corton for every three shares of Denham?
b. What is the cost of the acquisition if Corton pays $25 in cash for each share of Denham?
9. Merger gains and costs (S32.4) As financial manager of Corton Inc., you are investigating a possible acquisition of Denham Lathes. You have the basic data given in the following table. You
e. What is its NPV under the stock offer?
d. What is the NPV of the acquisition under the cash offer?
c. What is the cost of the stock alternative?
b. What is the cost of the cash offer?Chapter 32 Mergers 945
8. Merger gains and costs (S32.4) Velcro Saddles is contemplating the acquisition of Skiers’Airbags Inc. The values of the two companies as separate entities are $20 million and$10 million,
d. What is the change in the total market value of the World Enterprises shares that were outstanding before the merger?
c. What is the cost of the merger to World Enterprises?
b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle?
7. Merger motives (S32.3) The Muck and Slurry merger has fallen through (see Section 32-3). But World Enterprises is determined to report earnings per share of $2.67. It therefore acquires the
c. “Our stock’s at an all-time high. It’s time to make our offer for Digital Organics. Sure, we’ll have to offer a hefty premium to Digital stockholders, but we don’t have to pay in cash.
b. “Merge with Fledgling Electronics? No way! Their P/E’s too high. That deal would knock 20% off our earnings per share.”
6. Merger motives (S32.2–S32.3) Respond to the following comments.a. “Our cost of debt is too darn high, but our banks won’t reduce interest rates as long as we’re stuck in this volatile
5. Merger motives (S32.2–S32.3) Suppose you obtain special information—information unavailable to investors—indicating that Backwoods Chemical’s stock price is 40% undervalued.Is that a
4. Merger motives (S32.2–S32.3) Examine several recent mergers and suggest the principal motives for merging in each case.
3. Merger motives (S32.2–S32.3) Which of the following motives for mergers make economic sense?a. Merging to achieve economies of scale.b. Merging to reduce risk by diversification.®● ● ●
2. Mergers (S32.2–S32.7) True or false?a. Under purchase accounting any difference between the amount paid for the target’s assets and their book value is shown as goodwill in the merged
1. Mergers (S32.2–S32.7) True or false?a. Sellers almost always gain in mergers.b. Buyers usually gain more than sellers.c. Firms that do unusually well tend to be acquisition targets.d. Merger
1. Understand how venture capital firms design successful deals.
2. Understand how firms make initial public offerings and the costs of such offerings.
3. Know what is involved when established firms make a general cash offer or a private placement of securities.
4. Explain the role of the underwriter in an issue of securities.
5. Describe the terms of a rights issue.
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