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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

=19/What is the “reinvestment risk”?
=20/On a market where no zero-coupon bond is traded can you determine the two-year interest rate if you know the interest rate at one year and the price of a two-year bond?And then the rate for a
=21/And if you do not know the interest rate at one year?
=1/What rate of return should be required on the Bharti Airtel share, which has a β of 0.7, if the Rio Tinto share, which has a β of 1.1, returns 10% and is correctly valued, and the rate of a
=2/Are the following shares undervalued, correctly valued or overvalued? The rate for a riskfree asset is 5.5% and the market risk premium is 4%.Share Imperial Tobacco Walmart Volkswagen ING UBSβ
=3/You think that the Lapparent.com share will be worth €40 in one year. What price would you be prepared to pay today if the no-risk cash rate is 5%, the market rate of return is 9% and the β is
=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
=1/Take the example on page 477 and give a probability of 50% to the two states of the world. Calculate the value of A, B and G. Calculate the value of C, D and E. What are your conclusions?
=2/You offer investors the opportunity to invest 100, financed solely with equity. Assuming that no taxes are payable, projected constant annual profits to perpetuity are 25 (we assume that necessary
=(a) What is the rate of return required by the market on this investment?
=(b) The return on this investment only comes to 10 per year. If the required rate of return is not modified, what will the value of this share be on the secondary market?
=(c) Same question if the return on the investment is 50 per year? And if profits are nil?
=(d) What impact will all of the above scenarios have on the company?
=(e) Is it possible to define a simple rule on the creation and destruction of value?
=3/What does it mean when a source of financing is cheap?
=5/You are required to analyse a number of decisions and establish whether or not they will create value. You then have to decide whether value was, in fact, created or transferred on a general
=6/Analyse the following financial decisions. Do they send out positive, negative or neutral signals?Signal +− =Sale of company by managing shareholder Sale of company by non-managing shareholder
=7/What is synergy?
=8/Can we talk about financial synergy?
=9/What is a conglomerate discount? How can it be avoided?
=11/Reread Chapter 22 with your new insight into investment policy, especially the link between P/E and PBR, and the rate of return on the investment.
=13/Show how the conglomerate discount leads to an increase in the cost of equity.
=14/Can a signal be sent if there is no cash flow?
=15/What is an economic rent? What is it based on?
=16/A company that is close to insolvency carries out a capital increase. Is this a signal?Why?
= What criteria can you identify as being necessary for a decision to be described as a signal?
=18/Can you explain why the behaviour described in Question 17 could have the secondary effect of encouraging managers to diversify their groups’ activities?
=1/Rawhajpoutalah Intl., an Indian tobacco company, has two divisions, A and B, for which the figures are as follows:Division A Division B Capital employed 1000 1000 Expected return 15% 15%Net
=(a) What are the values for divisions A and B if you assume, for calculation purposes, that operating income is constant to perpetuity?
=(b) The company pays out 50 and so finances its investments for 300. The company invests everything in division B at the same return on capital employed (30%). How much value is created?
=(c) Same question if the 300 is invested in division A at the average rate of return of A(5%).
=(d) Same question if the 300 is divided equally between A and B.
=(e) What are your conclusions?
=3/What is a TSR calculated over one year?
=10/Is a drop in return on capital employed (ROCE) synonymous with value destruction? Why?
=11/Can a company create value and have a negative TSR over one year? And over 10 years?
=12/What does TSR correspond to in terms of investment choice?
=13/If you were stranded on a desert island with only one criterion for measuring value creation, which would you want to use? Why?
=14/If EPS drops after a deal, does this necessarily imply value destruction?
=15/If EPS rises after a deal, does this necessarily imply value creation?
=16/Why does an accurate calculation of EVA or profitability mean that the balance sheet will have to be restated?
=17/What is the drawback of company rankings based on EVA?
=18/Do layoffs systematically lead to value creation?
=19/Can value be created by developing new products and new markets or by reducing costs?
=1/Show that in the example on page 501, C’s EPS drops by 7% after the company merges with D.
=2/Use the figures provided in Section 1 (Chapters 4 and 9) and calculate the EVA and the MVA of Indesit in 2013. The weighted average cost of capital of Indesit is 8.7% and it has a market
=2/Define the payback ratio.
=3/What are the drawbacks of the payback ratio?
=4/Define return on capital employed.
=6/What purpose does the return on capital employed serve?
=8/What is the optimal depreciation method for a company that is not taxed?
=What about for a company that pays tax at the standard rate?
=9/A company is planning to build a new plant to replace an older one that is to be demolished. What are the most important flows to consider?(a) market value of the land and the older plant;(b)
=(h) constitution of working capital?
=10/When can investment in working capital be neglected?
=11/Provide examples of investments where residual value must under no circumstances be neglected.
=12/In an inflationary environment, how should you reason in evaluating an investment?
=14/Should an investment subsidy be included in investment flows or by reducing the discount rate?
=1/The following investment project is submitted to you:◦ Project: extension of an industrial plant;◦ purchase of equipment €20m;◦ set-up costs €1.5m;◦ useful life eight years;◦
=The project will result in an increase in EBITDA of €3m per year, over the eight years during which the new asset is used. The equipment is depreciated over five years. The corporate income tax
=(a) Draw up the cash flow schedule for the project, on the basis of straight-line depreciation.
=(b) Calculate each of the two cases:◦ net present value at 10%;◦ the internal rate of return of the project.
=2/A company is planning to replace a machine with a new, better-performing one. The figures for the investment are as follows:◦ Purchase of new machine:◦ cost €2m;◦ useful life five years,
=If the tax rate on profits and capital gains/losses is 40%, what is the “value” for the company of the new machine the company is planning to buy (this company’s required rate of return is
=Calculate the net present value and the internal rate of return of the planned investment.3/Take the following project:Period 0 1 2 3 4 5 Cash flow −100 110 −30 25 50 100
=What problem do you come up against when calculating the payback ratio? What is the NPV of this project at 10%? What is the internal rate of return?
=5/Industrial Electric plc estimates its needs for a component used in its products at 7000 units per year for the next 10 years. A subcontractor offers to supply the parts at €5 per unit.
=Industrial Electric can make the part in its own workshops for €3 per unit, if it buys a new machine. A new machine would cost €78 000, have a useful life of 10 years and a residual value of
=6/A large oil company has been invited to get involved in a project to build a parking facility in the centre of Frankfurt. The project includes a 450-car public parking lot, a 200-car garage and a
=Calculate the average of the accounting returns on the project, the discounted payback ratio, the net present value at 10% and the internal rate of return. Why is the IRR not equal to the average of
=7/A year ago, Robin plc invested in a machine to improve the manufacturing of one of its products. It has just discovered that a new machine has come onto the market which would improve performance
=(a) Draw up the cash flow schedule for the contemplated investment.
=(b) Calculate the discounted payback ratio on this investment.
=8/Pincer plc is hoping to increase sales by granting its customers longer payment periods. Its annual sales currently stand at €1m and it gives its customers an average of 30 days to pay.The
=Bad debts currently only account for 1.2% of debts. Which policy should the company introduce?
=3/Why is the cost of capital not an accounting concept?
=4/What is the cost of capital equal to?
=5/Is the cost of equity equal to the dividend yield?
=9/Can diversification reduce the cost of capital?
=10/Does a firm have a low cost of capital because it is leveraged or did it become leveraged because it has a low cost of capital?
=1/What is the cost of equity of a company whose shares are trading at 30.2 and which pays a dividend of 5 over five years and 6 after five years?
=2/What is the cost of debt for a company whose debt at 11% has a nominal value of 1000, is trading at 1037.9 and has a life of five years (redemption at maturity)?
=3/Use the answers to questions 1 and 2 and calculate the cost of capital of this company.The company has issued 1000 shares, the corporate tax rate is 34%.
=4/Calculate the cost of capital of a company for which the key figures are as follows:Equity Debt Book value 10 000 1000 Value 12 000 1000 Perpetual remuneration 1800 100
=5/What is the net present value of the following perpetual investment before and after tax?Cost: 100 Cash flow before tax: 26 Tax rate: 50%Capital structure:Percentage(%)Cost before tax(%)Cost after
=6/Cyclone case study The Cyclone group operates in three sectors: the sale of commercial shipping equipment, shipping of goods by sea between mainland India and Sri Lanka (the group owns two
=(a) What is your view of the financial health of this group (very simple financial analysis)?
=(b) The required return for a risk-free investment is around 6.5% (before tax) and the average required return for the market portfolio is 11% (before tax). Calculate the overall cost of capital
=3/What is interesting in the certainty equivalent method?
=6/Can a project that contains significant real options be valued properly by the NPV criterion? By the construction of scenarios? By the Monte Carlo method? By the certainty equivalent method?
=8/Provide an example of a project where there is an option to expand.
=10/What makes the contribution of real options attractive for operations managers?
=11/How do you interpret the acquisition by EDF of plots of land adjacent to British Energy nuclear plants a few months before the UK privatised this company (knowing that this land was necessary for
=1/An Internet portal aimed at pet owners has just developed a nuclear sewing machine and offers you the opportunity to invest in the industrialisation of this product. The project will last five
=What return will this project bring you?
=Given the project’s risk, you decide that you require a return of more than 20%. What investment do you offer?
=The founders, keen to obtain the €2.5m in question and believing firmly in the success of their project, offer you the following arrangement: you give them €2.5m and, if all goes well, you’ll
=5/ A company issues 1 000 000 shares at €1 of which 200 000 are for the founders and 800 000 are for the investors. The investors grant the founders call options with an exercise price of €1 on
=4/ A company issues 1 000 000 shares at €1 to the founders, and 800 000 shares at €10 to investors. Eighteen months later, it carries out a second capital increase in favour of an investment
=3/ Using the data from the previous exercise, what is the amount of goodwill that is generated by the capital increase?

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