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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

=10/ In a securitisation transaction, is the firm that has sold assets to the SPV at risk if the value of the assets is not enough compared to the debt commitment?
=9/ Which services can be proposed by a factor?
=8/ What is the difference between discounting and factoring?
=7/ How can banks propose cheaper credit than bonds to corporates?
=6/ What is the interest of an RCF for a firm?
=5/ How do banks finance the loans they grant to corporates?
=4/ Why are small companies restricted in the choice of a debt product?
=3/ What is the risk linked to discounting?
=2/ What other financial product can export credit be associated with?
=1/ Do banks take a risk when a firm issues commercial paper?
=(b) You estimate that the Butchery Withoutbones risk requires a spread of 58 basis points(0.58%) compared with government bonds. Calculate the value of the Butchery Withoutbones bond from Exercise 1.
=(a) Calculate the yield to maturity for each zero-coupon bond.
=3/On 21 February 2014, you see the following figures in Les échos de Moulinsart for Belgian Government zero-coupon bonds (which only pay a single coupon with the principal on maturity of a total
=(d) What advantages did this bond have for Mineral Waters from Syldavia?
=What were they expecting interest rates to do?
=(c) Did Mineral Waters from Syldavia borrow at a fixed or variable rate?
=(b) If you thought that interest rates were going to rise, which tranche would you choose?
=(a) Analyse the behaviour of these two bonds for different ABYs.
=2/In August 2014, Mineral Waters from Syldavia launched a two-tranche bond of the same size:Tranche A Tranche B Redemption at maturity in 10 years at maturity in 10 years Interest rate 8% + 1.5 ×
=(b) On 21 February 2015, 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
=(a) Calculate the yield to maturity of the bond on issue, its modified duration and its duration.
=1/Butchery Withoutbones issued the following bond:Amount: €125m Issue price: 99.731%Date of issue: 20 February 2014 Settlement date: 20 February 2014 Maturity: 7 years Annual coupon: 5.5%, i.e. in
=2/In what situation can a floating-rate bond trade at much less than 100%?
=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.
=10/The spread between a corporate bond yield to maturity and the government bond rate to maturity corresponds to an option. What are its features?
=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
=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
=7/Why was the yield to maturity of India Motors’s bond higher than the nominal rate at issue?
=(f) floating-rate bond with constant amortisation with five-year maturity.
=(e) floating-rate bond with constant instalments with five-year maturity;
=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
=5/Is the value of a floating-rate bond always equal to 100%? Why?
=4/Is a bond more volatile on the day of issue or on the day of redemption?
=3/What is the yield to maturity of a bond? How is it computed?
=2/What is the difference between the average life and the duration of a bond? For what type of bond are the two equal?
=1/What is face value? What is it used for?
• Understand basic option terminology
• Explain the difference between calls and puts, how they pay off, and the profit from holding each to expiration
• Analyze the factors that affect option prices
• Become familiar with the Black-Scholes option pricing formula
• Describe the relationship that must hold between the prices of similar calls and puts on the same stock
• Demonstrate how options are applied in corporate finance
5. If you own a call option at expiration and the stock price equals the strike price, is your profit zero?
9. Explain why equity can be viewed as a call option on a firm.
1. See the option quote on IBM from the CBOE Web site on the next page.a. Which option contract had the most trades today?b. Which option contract is being held the most overall?c. Suppose you
10. What is the maximum value that a call option and a put option can have?
*14. Express the position of an equity holder in terms of put options.
15. Express the position of a debt holder in terms of put options.
Your uncle owns 10,000 shares of Walmart stock. He is concerned about the short-term outlook for Walmart’s stock due to an impending “major announcement.” This announcement has received much
1. Download option quotes on options that expire in approximately one month on Walmart from the Chicago Board Options Exchange (www.cboe.com) into an Excel spreadsheet.If you choose to download
2. Determine your uncle’s profit and return using the protective put.a. Identify the expiring put with an exercise price closest to, but not below, the current stock price. Determine the investment
3. Determine your uncle’s profit and return using the straddle.a. Compute the investment your uncle would have to make to purchase the call and put with the same exercise price and expiration as
4. Was the broker correct that the protective put would prevent your uncle from losing if the announcement caused a large decrease in the stock value? What is your uncle’s maximum possible loss
5. What is the maximum possible loss your uncle could experience using the straddle?
6. Which strategy, the protective put or the straddle, provides the maximum upside potential for your uncle? Why does this occur?
• Discuss the types of mergers and trends in merger activity
• Understand the stock price reactions to takeover announcements
• Critically evaluate the different reasons to acquire
• Follow the major steps in the takeover process
• Discuss the main takeover defenses
• Identify factors that determine who gets the valueadded in a merger
9. How does a toehold help overcome the free rider problem?
• Explain the basics of foreign exchange
• Identify and hedge exchange rate risk
• Understand integrated capital markets and their implication for prices
• Determine how to handle cash flows in foreign currencies in capital budgeting
• Analyze the impact of different countries’ tax rates on investment decisions and firm value
• Show how to exploit opportunities from segmented international markets
• Demonstrate how to address exchange rate risk in your capital budgeting approach
1. How is an exchange rate used?
6. How are U.S. firms taxed on their foreign earnings?
*17. For Ityesi Inc.’s U.K. project example in Table 23.2, assume all sales actually occur in the United States and are projected to be $60 million per year for four years. The risk-free rate on
You are a senior financial analyst with IBM in its capital budgeting division. IBM is considering expanding in Australia due to its positive business atmosphere and cultural similarities to the
=1/ Why should we discount?
=2/ What is the discount factor equal to?
=5/ Why are capitalisation factors always greater than 1?
=6/ Why are discount factors always less than 1?
=9/ Belgacom pays out big dividends. Should its share price rise faster or slower than the share price of Google which doesn’t pay out any dividends? Why? Would it be better to have Belgacom stock
=10/ What is net present value equal to?
=11/ The higher the rates of return, the larger present values will be. True or false?
=12/ What mechanism pushes market value towards present value?
=13/ Can net present value be negative? What does this mean?
=14/ What does the discount rate correspond to in formulas for calculating present value and net present value?
=15/ Are initial flows on an investment more often positive or negative? What about for final cash flows?
=16/ A market is in equilibrium when present values are nil and net present values are positive. True or false?
=18/ Can the growth rate to infinity of a cash flow be higher than the discount rate? Why?
=19/ Could an investment made at a negative net present value result in the creation of value?
=20/ Would you be more likely to find investments with positive net present value on financial markets or on industrial markets? Why?
=21/ Which of the formulas in Section 16.6 is more appropriate for valuing a rented building, the Belgacom share price, a bond?
=2/What is the present value at 10% of €100 received in three years, five years and 10 years?
=What are the discount factors?
=3/How much would €1000 be worth in five years, invested at 5%, 10% and 20%? Why is the sum invested at 20% not double that invested at 10%?
=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?
=5/You are keen to obtain a helicopter pilot’s licence. A club offers you lessons over two years, with a choice between the following payment terms:you can either pay the full fees (€10 000)
=At what interest rate would these two options work out at the same cost?
=6/What is the present value at 8% of €100 to be received in three years, five months and 17 days?
=7/How much would you have to invest today to have 100 in eight years if the interest rate was 5%? What is the capitalisation factor?
=8/At 7%, would you rather have €100 today or €131.1 in four years’ time? Why?
=10/Show that in order to treble your money in N years, the interest rate would have to be around 125%/N.

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