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business
fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

=(b) What is the value of Holding plc’s debt according to the options theory? What is the yield to maturity?
=(a) What is the new value of Holding plc’s equity according to the options theory?
=3/Take the figures for Holding plc (page 629) and assume that the shareholders in the company decide to pay out a cash dividend of £13 380 totally financed by the sale of 63 shares in Daughter plc
=2/Companies A and B each have to pay 100 to their creditors in one year. The risk-free rate is 5% per year. Below are the key figures for companies A and B, before and after a capital increase of 50
=(c) What could you do to increase the value of the company’s shareholders’ equity? Make several suggestions. Which would seem to be the most realistic to you? Why? Would you be creating value?
=(b) Can you value the shareholders’ equity and the debt of Verfinance with the data you have?
=(a) Does the above table seem consistent to you?
=1/The investment firm Verfinance owns 5000 shares in Uninet, a group involved in the maintenance products sector, worth 10 million. This asset is financed by a five-year zerocoupon bond (issued
=11/If lenders are seeking to hedge their loan, should the impact be positive or negative on the share price of the borrower?
=10/ Can you give an example of a kind of company where shareholders’ equity is made up of pure time value?
=(c) What financial product do these examples of creditor–shareholder relationships bring to mind?
=(b) Would your answer be different if the company were profitable and carrying very little debt?
=(a) Do you think that the creditors and the shareholders have the same concerns?More specifically, in the event of the following:◦ massive new investments carrying a very high risk but that will
=9/A company is in trouble as a result of low profits and excessive debts.
=5/Why is the application of this theory more efficient for companies in difficulty?
=4/Redo the table on page 612 for the Netherlands and Tunisia assuming two situations: no debt and 500 of debt at 7%. Assume the Tunisian tax rate on interest is 35%, corporate income tax is 30% and
=(c) By how much will the enterprise value fall if there is a change in the tax laws and in four years’ time financial expenses will no longer be tax-deductible?
=(b) By how much will the enterprise value increase if the company borrows 5 on the same terms as previously (assume a required rate of return of 11% to simplify calculations)?
=(a) How much of C’s enterprise value is due to debt? The shareholders’ required rate of return is 11%.
=3/Company C is financed by equity with a market value of 40 and by debt with a market value of 30. This debt is perpetual and its interest rate is 6%. The corporate income tax rate is 40%.
=17/If there was an optimal debt-to-equity ratio, should it be stable over time? Why?
=15/Is it better to calculate a leverage ratio on the basis of book values or market values of debt and equity to assess the level of risk taken by a company? Why?
=14/In your view, can the theories of capital structure described in this chapter be proven with as much certainty as, say, the put/call parity described in Chapter 23 that deals with options? Why?
=13/In your view, after a failed takeover bid, will the debt-to-equity ratio of the target tend to rise or fall? Why?
=11/According to signal theory, should undervalued companies carry more or less debt than other companies? Why?
=8/Why do managers tend to be wary of debt?
=1/According to the approach by Modigliani and Miller (1963), how does the value of a levered company differ from the value of an unlevered company?
=4/Deutsche Telekom and France Telecom have a similar economic risk. The beta of France Telecom shares is 1.4, and is 1.1 for Deutsche Telekom. If the no-risk cash rate is 3.5%and the risk premium is
=(d) What is the β of the debt, if the β of the capital employed is equal to the averageβ of the capital employed and the debt weighted by the relative share of debt and equity in financing the
=(c) If the market risk premium is 4% and the β of the company’s shares before it went into debt was 1.2, what is the new β of shares after the capital reduction?
=(b) It decides to borrow 33.5% of the value of its operating assets at a rate of 5% in order to finance a capital reduction of 33.5%. What is the cost of equity now?
=(a) What is the cost of equity for this company?
=3/A company with no debts has a weighted average cost of capital of 8%.
=2/In a tax-free world, companies B and C are similar in every respect, except their capital structures. B has no debts while C has debts of 24 000 at 5%. The companies have been valued as
=1/Sixty per cent of company A’s needs are equity-financed at a cost of 9%, and 40% are debt-financed at 5%. Excluding tax, what is the weighted average cost of capital of this company?
=11/What is the cost of net debt of a company that has no more shareholders’ equity equal to? And the cost of capital?
=10/Can a company create value by going into debt?
=8/Is the cost of capital an accounting or financial concept?
=6/What are Modigliani and Miller’s theories based on?
=2/What is the cost of capital equal to?
=4/You have to value Nestlé, the Swiss food group, using a peer-comparable method. In 2013, Nestlé earned an operating income of CHF 14bn and had, as of 31/12/2013, a net financial debt of CHF
=3/The mean multiple for the 2014 operating profits of comparable peers is 10, and the mean 2011 P/E is 15. Calculate the equity value of Pixi Spa. Key figures for the company are set out
=The company is expecting annual capital expenditure of €300m per year over the next five years; working capital will increase by €50m in years 1 and 2, and stabilise thereafter. The following
=2/The table below shows the forecasts for Management plc (in millions of €):Year 1 2 3 4 5 Sales 3960 4080 4200 4326 4458 Cost of goods sold 1782 1794 1806 1860 1917 Marketing costs 870 897 924
=◦ What do you conclude from the above?
=◦ What is the present value of shareholders’ equity?
=1/Megabyte plc is a high-tech company experiencing transitional problems. To get through this difficult period, management has decided on a €120m recapitalisation. In five years’time, the
=19/ Which lesson can you derive from the graph in this chapter showing EV/EBITDA of acquisitions and market prices?
=17/What is the popular saying on which the cash flow fade method is founded?
=16/Why can we say that the mean or the median figure is the choice of an indecisive person?
=15/Has a reduction in working capital of 1% the same impact on a DCF as a 1% improvement in the EBIT margin?
=14/Can the purchase of a company by venture capitalists create value? And by trade buyers?
=13/Name the types of companies for which cash flow value is much higher than net asset value.
=12/When a company is bought, is there a control premium?
=11/Which method should be used for estimating the value of a company in decline?
=10/What are the two determining factors when valuing a wine estate?
=8/Can an asset have several values? Why?
= Explain why foreign investors often offer the highest price. What is the role of the investment bank?
=4/Logically, should a foreign investor with little knowledge of the country pay more or less for a company?
=3/What is a synergy?
=Show how the situation differs between a listed company and an unlisted company.
=2/What sort of a discount can a minority shareholder get compared with financial value?
=(c) If you own 9000 Billabong shares, what should you do before and after the capital increase so that your portfolio remains more or less as it is?
=(b) Calculate the theoretical ex-right price.
=(a) Calculate the theoretical value of the pre-emptive subscription right.
=1/In February 2014, Billabong carried out an issue of shares with subscription rights. Two new shares were to be issued at a price of A$0.28 for nine existing shares. Before the capital increase,
=10/Why can convertible bonds be placed so quickly?
=8/Which party is the bank that places the shares working for – the issuer or the investor subscribing to the shares?
=7/Will a shareholder who subscribes to a capital increase with a pre-emptive subscription right become poorer if the share price drops after the operation? Why?
=3/What financial product can a greenshoe be compared to?
=2/Why does it take longer to set up a share issue than a bond issue?
=1/What is a prospectus used for?
=(c) What would be the result of the calculation in (b) above if X issued the bond with warrants to pay off another borrowing at a pre-tax interest rate of 8%? Assume that the expected net profit is
=(b) Redo the same exercise, replacing the convertible bond with a bond with attached warrants to subscribe to one share of X at €2100. Assume the pre-tax rate of return on short-term investments
=(a) Calculate X’s fully diluted earnings per share. The corporate income tax rate is 36.7%.
=1/Company X has capital of 2 million shares that are currently trading at €2000 per share.On its balance sheet it has a liability for an issue of convertible bonds with the following
=12/Why isn’t a bond redeemable in shares attractive to financial investors?
=10/Given your answers to Questions 8 and 9, how do you explain the existence of convertible bonds?
=What is the breakdown of that cost?
=3/The bond market yield is 7%. A company issues a bond with equity warrants at a gross yield to maturity of 3% assuming the warrants are not exercised. What is the cost of this product?
=2/You wish to value a call option on Google shares (which do not pay dividends) with a strike price of $600 and a six-month duration. You do not know what volatility to factor in. Fortunately,
=1/ The Konzerthaus in Berlin sells tickets known as Nacheinlasskarten, thirty minutes before the start of every concert that has been sold out.Buyers of these tickets wait at the doors giving access
=14/In your view, what is the main contribution of the Black–Scholes model?
=11/Why are options particularly well suited to arbitrage strategies? And speculation?
=10/In concrete terms, what does the difficulty in valuing an option boil down to?
=6/How would this investor find counterparties?
=4/What impact will a rise in volatility have on the value of a call option? And a drop in interest rates? And payment of a dividend? And the extension of the maturity of an option? And an upward
=3/What does the delta of an option indicate?
=1/Define a call or put option.
=3/For each of the following shares, provide an approximation of the missing figure (?) and then give your view of each share.Share A Share B Share C Share D P/E 10 25 7 50 Payout ratio d 95% 20% 20%
=2/What is your view of the following companies?Company Share price EPS(€)EPS CAGR(2012 -2014)Beta Payout Yield BV/S P/E 2014 2012 2013 2014 ArcelorMittal 11.5 −0.2 −0.95 0.33 NM 1.32 42% 1.3%
=1/You buy a stock which has the following features: ◦ price: €500 ◦ EPS: €33.3 ◦ payout ratio: 25% ◦ projected EPS growth 15% What will EPS have to be equal to in year 3 for you to get a
=11/The higher the interest rates, the higher the EBIT multiple. True or False?
=10/What are the three drivers of the level of EBIT multiple?
=9/What does a PBR that is much higher than 1 mean?
=what is this a sign of? If dividend growth is higher for the total amount of dividends paid out than the payout per share, what is this a sign of? What are your conclusions?
=8/If dividend growth is higher per share than for the total amount of dividends paid out,
=2/Define growth stock and income stock.
=1/Why is adjustment necessary?
=11/ Why do rating agencies request a backup line to grant a decent rating to a commercial paper issuance programme?

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