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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

=6/In order of listing: net debt, shareholders’ equity, fixed assets, working capital, working capital, net debt.
=5/The balance resulting from the activity is what appears on the balance sheet, i.e. the profit or loss, not the activity itself measured by sales.
=4/Inflow, “stocks”, inflow, change in outflow, outflow, change in inflow, inflow.
=3/No, in some industries, there is a long period between the invoice date and customer payment (e.g. movie rights).
=2/The solvency-and-liquidity analysis, the capital-employed analysis.
=1/Capital-employed analysis of the balance sheet: for understanding the company’s use of funds and how they were financed. Solvency-and-liability analysis of the balance sheet: for listing all
=16/Does the company operating Singapore Kite Surf Magazine (see previous chapter) have a positive or negative working capital?
=15/The main manufacturers of telephony equipment (Ericsson, Nokia, etc.) provided telecoms operators (Deutsche Telekom, Swisscom, etc.) with substantial supplier credit lines in order to assist
=14/Give examples of businesses with negative working capital.
=13/Give examples of businesses with positive working capital.
=12/What is another way of describing a cumulative inflow or outflow?
=11/What is the difference between liabilities and sources of funds?
=10/What is another way of describing a difference in “stocks”?
=9/Give a synonym for net assets.
=8/Assess the liquidity of the following assets: plant, unlisted securities, listed securities, head office building located in the centre of a large city, ships and aircraft, commercial paper, raw
=7/Is a company that is currently unable to pay its debts always insolvent?
=6/Classify the following balance sheet items under fixed assets, working capital, shareholders’ equity or net debt: overdraft, retained earnings, brands, taxes payable, finished goods
=5/A company’s sales clearly represent a source of funds. However, they do not appear on the balance sheet. Why?
=4/Classify the following as “stocks”, in/outflows, or change in in/outflows: sales, trade receivables, change in trade receivables, increase in dividends, financial expense, increase in sales,
=3/Do liabilities that arise during the operating cycle always have a maturity of less than one year?
=◦ when forecasting a company’s working capital?
=◦ when giving a warranty on the balance sheet of a company being sold?
=2/Which approach to the balance sheet should you adopt:
=1/When do we use a capital-employed analysis of the balance sheet? And when do we use a solvency-and-liquidity analysis of the balance sheet?
=(c) Breakeven point after financial expense with the envisaged level of debt:123 Breakeven point after financial expense 96.8 119.0 133.3 Debt capital significantly increases breakeven point and,
=(b) A good investment: improvement in earnings with fixed costs rising at a slower pace than production. The company is moving further away from its breakeven point.Trebling production capacity only
=3/(a) Economic breakeven point Schmidheiny 0123 Production 70.2 106 132 161 Variable costs 38.75 54.2 67.8 80.35 Contribution 31.45 51.8 64.2 80.65 Contribution as a % of sales 44.80% 48.87% 48.64%
=(e) The company is not investing and the explanation for the increase in financial expense probably lies in the rise in working capital (increase in inventories).
=(d) The management of Grupo Hoyos keeps tight control over raw materials, probably a reflection of a sound procurement policy. External charges are also well managed.Personnel cost, however, is out
=(c) With depreciation and amortisation down in absolute value, we can conclude that the company is not overinvesting in fixed assets.
=(b) With stable margins on purchases and an increase in other costs, the company is clearly approaching its breakeven point.
=2/(a) Personnel cost will increasingly eat into EBITDA. Given the steep rise in financial expense, profit before tax and non-recurring items decreases in both absolute and relative value. The
=1/A detailed Excel version of the solutions is available at www.vernimmen.com.A BCD Sales 100 100 100 100 Contribution 35 45 64 70 Contribution in % of sales 35% 45% 64% 7%Breakeven point before
=(c) The company will need to raise around €30m to finance this capital expenditure programme. Financial expense before this capital expenditure programme amounts to €1.6m, and Schmidheiny is
=1, includes the construction of four factories and the launch of new products. The income statements for years 1, 2 and 3 factor in these investments. State your views.
=(b) Schmidheiny is planning a capital expenditure programme which should increase its production capacity threefold. This programme, which is spread over years 0 to
=(a) Calculate the breakeven point for each year. The cost structure is as follows:◦ variable costs: raw materials used, outsourcing, 50% of other external services;◦ fixed costs: all other costs.
=3/In January of year 0, the Swiss group Schmidheiny published the following projected figures:0123 Production 70.2 106 132 161 Raw materials used 29.4 35.4 44.3 53.8 Personnel cost 22.2 29.4 36.7
=(e) Explain the rise in financial expense.Grupo Hoyos 1 2 3 Sales 82 000 92 000 97 000 Change in finished goods and in-progress inventory 500 1400 2800 Production 82 500 93 400 99 800 Purchases of
=(d) What choices are made with regard to cost control?
=(c) In your view, is the company in a period of heavy capital expenditures?
=(b) Is the company moving closer towards or further away from breakeven point?
=(a) What is your opinion of the company?
=2/Below are the income statements for the Spanish Hoyos group. The company asks you to analyse these statements and answer the following questions:
=For each company, calculate the breakeven point, before and after financial costs, and the company’s position relative to its breakeven point.
=1/Below are the income statements of four companies with the same level of sales, but with different production costs and financial structures.A BC D Sales 100 100 100 100 Variable costs 65 55 36 30
=10/Are bonuses a fixed or variable cost?
=9/What is the operating leverage? What does it depend on? On page 171 (second table), which group has the lowest operating leverage?
=8/On page 171, which of France Télécom and Maroc Télécom is the closer to breakeven?
=7/A major investment bank announces the best half-year results it has ever achieved. State your views.
=6/Is personnel cost a variable or a fixed cost?
=5/You are appointed financial director of a cement group which has a fairly substantial amount of debts. What should you be concerned about?
=4/You are appointed financial director of a cement group which has no debts. What should you be concerned about?
=3/Would it be better for an Internet start-up company to finance its needs using equity or debt?
=2/Would it be better for an oil refinery to finance its needs using equity or debt?
=1/A company’s net income, which was 0.2% of sales in year 1, leaps by 40% in year 2. State your views.
=3/ The table below appears on page 2 of the annual report of the Norne group.Key financials (unaudited, in millions of $, excluding earnings per share and dividends):1996 1997 1998 1999 2000 Sales
=(b) Would you be of the same opinion if you had carried out an analysis beforehand of the company’s value chain and simulated the impact of a crisis in N+3 (11% increase in labour costs due to the
=(a) What is your view on the financial health of Guizzardi?
=2/Guizzardi is one of the main Italian producers of synthetic raincoats. It sells two product ranges – the fashion and the classic raincoat – through supermarkets. Most of the Guizzardi
=◦ Feed: produced by animal feed groups, which develop subtle blends of wheat, maize and soya or rapeseed proteins.◦ Slaughterhouses: 20 000 chickens are anaesthetised, decapitated, processed and
=◦ Rearing: chickens are reared for around 40 days, until they reach a weight of 1.8kg. This function provides additional income for a couple who, thanks to computerised equipment, only need to
=◦ Hatcheries: the eggs are placed in incubators stacked in batteries for an 18-day incubation period followed by a three-day hatching period, and kept at the appropriate temperature and level of
=◦ Breeding of laying hens: a laying hen lays eggs for 18 months non-stop, after which it is sold to the pet food industry.
=1/Carry out an analysis of the frozen chicken value chain and decide which participants in the value chain are in a structurally weak position. The main participants in the chicken value chain are
=17/At the end of the day, what is the objective of the financial analyst?
=16/What assumptions are made in a comparative financial analysis, especially on an international scale?
=15/Why will vertical integration be dismissed as being of little value after an analysis of the value chain?
=14/What is your view of the Italian proverb traduttore, traditore (to translate is to betray)?
=13/Is financial analysis always doomed to be too late to be useful?
=12/Why start a financial analysis with a study of wealth creation?
=11/What are the strengths of a trend analysis?
=10/Why does the financial expense/EBITDA ratio play such a fundamental role in scoring techniques?
=9/What criticism can be directed at scoring techniques?
=8/When is it possible to compare the EBIT margin of two companies?
=7/What standard ratios are applicable to all companies?
=6/What is a standard financial analysis plan?
=5/When a new product is launched, should the company invest in the production process or in the product itself? Why?
=4/Why is there less risk on an original equipment market than on a replacement products market?
=3/Is a market an economic sector? Why?
=2/What are the two prerequisites for financial analysis?
=1/Do shareholders and lenders carry out financial analysis in the same way?
=11/No, it will not impact on the company’s cash flow as it is a pure accounting entry.
=10/Impairment losses reduce earnings, but also bring down working capital: they cancel each other out at the level of the cash flow from operating activities.
=9/Because it is easier to modify the cash position of a company at year end than the net debt position which reflects its true level of indebtedness.
=8/Changes in working capital.
=7/Change in trade receivables.
=6/The difference between EBITDA and operating cash flow is nothing but new invoices received or sent but not yet paid either by the company or its customers, or variation in inventories, i.e.
=5/No, cash flow is not a measure of increase in wealth because it does not take into account depreciation, which reflects the wear and tear of fixed assets and thus a source of wealth destruction.
=4/Depreciation, amortisation and impairment losses on fixed assets and provisions for liabilities and charges.
=3/Unlike operating cash flow, cash flow from operating activities encompasses not only operations but also financial expense, tax and some exceptional items.
=2/(a) Yes, as depreciation and amortisation are expenses; no, except for corporate income tax, as depreciation and amortisation are non-cash expenses. (b) Yes and yes, as corporate income tax is a
=1/Yes, the lower inventories are valued, the lower net income for the current year. No, except for corporate income tax.
=11/ Will a capital increase by way of incorporation of reserves appear on the cash flow statement?
=10/Make use of the cash flow statement to show how impairment losses on current assets have no impact on cash.
=9/Why is a decrease in net debt more relevant than change in cash position or marketable securities?
=8/What is the difference between cash flow and cash flow from operating activities?
=7/What difference is there between sales in a financial year and operating receipts over the same period?
=6/Why is the difference between EBITDA and operating cash flows equal to a change in working capital?
=5/Is cash flow a measure of an increase in wealth? Or an increase in cash?

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