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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

9. When should you use the equivalent annual annuity?
7. How does the MIRR solve the problem of multiple IRRs?
6. When is it possible to have multiple IRRs?
1. What is the NPV rule?
• Rank projects when a company’s resources are limited so that it cannot take all positive-NPV projects
• Evaluate projects with different lives
• Choose between mutually exclusive alternatives
• Understand alternative decision rules and their drawbacks
• Use the NPV rule to make investment decisions
• Calculate Net Present Value
9. At the last minute, Jenna considers investing in Coca-Cola stock at a price of $55.55 per share instead. The stock just paid an annual dividend of $1.76 and she expects the dividend to grow at 4%
8. Should Jenna sell her Treasury bond and invest the proceeds in the stock fund? Give at least one reason for and against this plan.
7. Jenna expects her salary to grow regularly. While there are no guarantees, she believes an increase of 4% a year is reasonable. She plans to save $3000 the first year, and then increase the amount
6. Suppose Jenna sells the bond, reinvests the proceeds, and then saves as she planned.If, indeed, Jenna earns a 9% annual return on her savings, how much could she withdraw each year in retirement?
5. Suppose Jenna’s Treasury bond has a coupon interest rate of 6.5%, paid semiannually, while current Treasury bonds with the same maturity date have a yield to maturity of 5.4435% (expressed as an
4. Suppose instead Adam has a lot of credit card debt, with an 18% APR, and he doubts he will pay off this debt completely before he pays off the car. What is Adam’s best option now?
3. In fact, Adam doesn’t have sufficient cash to cover all his debts including his (substantial)student loans. The loans have a 10% APR, and any money spent on the car could not be used to pay down
2. Suppose that, similar to his parents, Adam had plenty of cash in the bank so that he could easily afford to pay cash for the car without running into debt now or in the foreseeable future. If his
1. What are the cash flows associated with each of Adam’s three car financing options?
8. Achi Corp. has preferred stock with an annual dividend of $3. If the required return on Achi’s preferred stock is 8%, what is its price? (Hint: For a preferred stock, the dividend growth rate is
1. What rights come with a share of stock?
• Value a stock as the present value of its expected future dividends
• Compare how trades are executed on the NYSE and NASDAQ
• Describe the basics of common stock, preferred stock, and stock quotes
• Value a stock as the present value of the company’s total payout
• Appreciate the limitations of valuing a stock based on expected dividends
• Understand the tradeoff between dividends and growth in stock valuation
=What is your view of the solvency of the following companies? Groups Y N P Intangibles 2549 2549 5700 Tangibles 151 151 12438 Working capital –254 –254 −4603 Shareholders’ equity 1530 1530
=11/Do you assess liquidity by analysing statutory or consolidated accounts?
=10/Do you assess solvency by analysing statutory or consolidated accounts?
=9/Why is the concept of net book value useful?
=8/Why is it difficult to determine the exact value of net assets in consolidated financial statements?
=7/It has been said that a solid financial structure is a guarantee of freedom and independence for a company. Is this true?
=6/Is a company with negative net assets illiquid? Insolvent?
=What move in interest rates does this company expect?
= what way does the risk manifest itself?
=And a solvency risk?
=5/A company goes into debt with a one-day maturity in order to buy fixed-rate bonds. Is it running a liquidity risk?
=4/Is an insolvent company necessarily required to declare itself bankrupt?
=3/What is solvency?
=2/What is the ultimate guarantee that the lenders will be repaid?
=1/What risks do lenders run? How can lenders protect themselves against these risks?
= Will it generate a higher rate of return than that required by those that have provided it with funds? That is, will it be able to create value?
= Will the company be solvent? That is, will it be able to repay any loans it raised?
=5/What is your view of the liquidity of this company?7-year fixed assets 200 Shareholders’ equity 100 3-year fixed assets 200 5-year debts 200 3-month inventories 300 1-year debts 300 2-month
=Decrease in net debt −300 −800 400
=4/What is your view of Moser srl?Moser srl 1 2 3 Cash flow from operating activities 400 300 −200 Capital expenditure 1000 1100 300 Asset disposals 0 0 300 Capital increase 300 0 600 Dividends 0 0
=3/What is your view of Ringkvist AB?Ringkvist AB 1 2 3 Cash flow from operating activities 400 700 1600 Capital expenditure 1000 1300 1400 Asset disposals 0 0 0 Capital increase 300 300 0 Dividends
= A negative capital increase correspond to a share buy-back
=2/Analyse and compare the summary cash flow statements of Vodafone, Carrefour and Peugeot for 2012 and 2013.In £ or € million Vodafone Carrefour Peugeot Cash flow from operating activities 14824
=Draw up the cash flow statement for years two to five.State your views.
=1/Below are the key figures for the company Ivankovic over the last five years.1 23 4 5 Fixed assets 100 110 120 130 140 Working capital 200 225 250 280 315 EBITDA 38 40 44 48 52 Depreciation and
=9/The debt-to-equity ratio of National Grid (which owns the high-voltage electricity transmission network in the UK and in New England) was around 1.9 in 2014. State your views.
=8/Short-term interest rates are currently very low and you are offered a three-month loan.State your views.
=7/In your view, should short-term debt be separated out from medium- to long-term debt on the cash flow statement? Why?
=6/Is a company with a current ratio below 1 illiquid?
=5/On what conditions can a banker lend a company seven times its EBITDA?
=4/Is financial expense included in cash flow from operating activities?
=3/Your marketing manager suggests that you launch a marketing drive, giving some customers discounts and advantageous payment terms. State your views.
=2/Should capital expenditure levels depend on cash flow from operating activities?
=1/Why is it imperative to analyse the cash flow statement?
=6/Give your views of Air Liquide’s investment policy since 1990, as represented in the following graph (data in €m):0 500 1,000 1,500 2,000 2,500 3,000 1991 1993 1995 1997 1999 2001 2003 2005
=Calculate normal working capital as a percentage of sales.
=5/Below are details of a distribution company’s operating terms and conditions:◦ days of goods held for resale: 24 days;◦ supplier credit: 90 days;◦ customer credit: 10 days;◦ purchases:
=◦ VAT is payable at 20% on sales and purchases. VAT payable for month n equals the difference between VAT collected on sales in month n and VAT recoverable on sales in month n, and is paid at the
=◦ operating charges other than purchases of goods for resale and staff costs are paid in cash;
=4/ Below are the operating terms and conditions of a trading company:◦ goods held for resale rotate four times a year;◦ cost of goods sold is equal to 60% of sales (excl. tax);◦ customers pay
=3/Calculation of working capital ratios.Working capital for Moretti SpA over the last five years (at 31 December) was as follows:(In €m) 2010 2011 2012 2013 2014 Inventories of finished goods 6.1
=2/The operating details for Spalton plc are as follows:◦ permanent working capital equal to 25% of sales;◦ sales rise from 100 million in year 1 to 120 million in year 2;◦ EBITDA rises to 15%
=20. Operating cycle: raw materials inventories = 15 days, length of production cycle = one month, inventories of finished products = 15 days. Payment terms: suppliers two months, customers one
=1/The Belgian Vandeputte Group has the following operating structure: sales = 100, raw materials used in the business = 30, direct production costs = 40, administrative costs =
=13/In what sector is the largest investment in change in working capital?
=12/In what kind of sector is capex very low?
=11/Do investments always take the form of capex?
=10/Do you believe that Internet retail businesses carry high working capital?
=9/Is calculating the ratio of non-operating working capital/sales a worthwhile exercise?
=8/An aeronautics group has substantial inventories of unfinished goods. What consequences will this have? What measures would you suggest to improve this situation?
=7/The perfume division of Unilever has decided to launch a new perfume. During the first weeks following the launch, sales to retailers are high. Can the new perfume be considered a success?
=6/The financial director of a company makes the following comments: “The company performed remarkably well this year. You be the judge – our depreciation policy enabled us to generate 50% more
=5/How does working capital behave in an inflationary period?
=4/Explain why, during a recession, working capital will decline at a slower pace than sales.
=3/Is the permanent part of working capital liquid?
=2/If income is recorded on a company’s books on the day it is received (and not on the invoice date) and costs on the date of payment, would this generate working capital? If so, how would this
=1/Can it be said that the working capital calculated on the balance sheet is representative of the company’s permanent needs?
=** Are the company’s current capital expenditures appropriate, given the rate of technological innovation in the sector?
=** Is the company’s production equipment ageing?
=** Is the company living off the assets it has already acquired (profit generated by existing fixed assets)?
=** What are the cash flows generated by these investments?
=** What is the company’s capital expenditure policy?
=** What is the state of the company’s plant and equipment?
=16/A negative working capital.
=15/These are, in fact, merely financial loans and not operating loans, granted to enable the telecoms operator to buy the equipment made by the manufacturer. These loans should be treated as fixed
=14/Movie theatres (no inventories, cash payment from clients), pay TV (subscriptions paid in advance), public works (advance payment from clients).
=13/Most businesses: publishers, appliance manufacturers, chemical industry, etc.
=12/A “stock”.
=11/Sources of funds include shareholders’ equity (which does not have to be repaid and is consequently not a liability) and liabilities (which sooner or later have to be repaid).
=10/An inflow or outflow.
=9/Shareholders’ equity.
=8/In order of decreasing liquidity: listed securities, commercial paper, raw materials inventories, head office, unlisted securities, ships and aircraft, work-in-progress inventories, plant.
=7/In theory, no, as the company may be facing a temporary credit crunch, but most of the time yes because it will have to dispose of assets quickly or stop its activities which will result in a big

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