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business
fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

=4/What non-cash charges must be factored back into calculations of cash flow?
=3/What differences are there between cash flow from operating activities and operating cash flow?
=2/Are net income and cash position, respectively, influenced by:(a) depreciation and amortisation(b) corporate income tax(c) equity issue through cash contribution(d) cash purchase of fixed
=◦ the company’s cash position?
=◦ the company’s net income?
=1/Do inventory valuation methods influence:
=3/Other than the word “market”, what is the key word in corporate finance?
=7/Can you define a financial security?
=9/How important is it to think in terms of an offer of and a demand for securities, and not in terms of an offer of and a demand for capital, for:◦ shares;◦ bonds;◦ medium-term syndicated
=10/What other financial term should immediately spring to mind when you hear the word“returns”?
=11/In your view, are more securities issued on the primary market or exchanged on the secondary market?
=12/What other financial term should immediately spring to mind when you hear the word“risk”?
=13/Which instrument carries the greater risk – a share or a bond? Why?
=14/Explain how the poor performance of the secondary market can impact the primary market.
=15/What are the two biggest flaws of a bad financial manager?
=16/What are the two main types of securities issued by a firm?
=17/Why do you believe management has to do some roadshows before issuing new shares or bonds?
=18/Why would you finance a firm’s investments with a very short-term loan? What would the drawback be?More questions are waiting for you at www.vernimmen.com.
=1/As an automatic reaction, yes, as value moves in the opposite direction to interest rates.
=2/The answer in this case would be no. The most important factor in valuing securities is anticipation.
=3/Value.
=4/On the futures market.
=5/Is it worth providing a guarantee for a gain of 0.5%?
=6/A financial asset if the present value of future flows is positive (which it is for the investor), and a liability if not (which is the case for the issuer).
=7/A financial security is a tradable contract represented by a series of cash flows to be received according to a set timetable.
=8/The inheritance of an estate, the debts of which exceed the value of the assets.
=9/In order – 1 = very important; 2 = of moderate importance; 3 = unimportant: 1223, because they are more easily traded.
=10/Risk.
=11/No, far fewer securities are issued on the primary market than exchanged on the secondary market. In 2013, worldwide, listed companies issued $191bn worth of new shares, whereas the value of
=12/Returns, the two are inextricably linked.
=13/Shares, as returns are not guaranteed for the investor, and creditors are paid out before shareholders.
=14/If the value of shares continues to decline long term, market pessimism descends, and investors become reluctant to subscribe shares on the primary market, as they are convinced that the value of
=15/Shortsightedness and poor marketing skills.
=16/Shares and debts (loans and bonds).
=17/This is called marketing: they are trying to sell at best one product which is a financial instrument in order to lower their cost of funding.
=18/To benefit from lower interest rates (as we will see in Chapter 19, short-term interest rates are generally lower than long-term interest rates). But in that case the firm will run a strong
=1/What are the four basic cycles of a company?
=4/Is operating cash flow an accounting profit?
=8/A feature of a supermarket chain such as Tesco in the UK or the Dutch retailer Ahold is a very fast rotation of food stocks (six days), cash payments by customers, long supplier credit periods (60
=10/How is an investment decision analysed from a cash standpoint?
=11/After reading this chapter, can you guess how to define bankruptcy?
=12/Is debt capital risk free for the lender? Can you analyse what the risk is? Why do some borrowers default on loans?
=1/Boomwichers NV, a Dutch company financed by shareholders’ equity only, decides, during the course of year n, to finance an investment project worth €200m using shareholders’equity (50%) and
=2/Ellingham plc opens a Spanish subsidiary, which starts operating on 2 January 2014. On 2 January 2014 it has to buy a machine costing €30m, partly financed by a €20m bank loan repayable in
=The supplier grants the company a 90-day payment period. Other costs are:◦ personnel costs of €4m per month;◦ shipping, packaging and other costs amounting to €2m per month and paid at 30
=How much cash will the subsidiary need at the end of each month over the first year? And if operations are identical, how much will it need each month over 2015? What is the change in the cash
=1/Operating, investment, debt and equity cycles.
=2/Because negative free cash flows generated by operating and investment cycles must be compensated by resources from the financial cycle. When free cash flows are positive, they are entirely
=3/It is the balance of the operating cycle. No, as it has to repay bank debts when they are due, for example.
=4/No, it is a cash flow, not an accounting profit.
=5/It measures flows generated by the company’s operations, i.e. its business or raison d’être.If it is not positive in the long term, the company will be in trouble. Major shortfall due to
=6/Yes. At the beginning, an investment may need time to run at full speed.
=7/Free cash flows since all operating or investment outlays have been paid. The lenders because of contractual agreement.
=8/A cash surplus, as customer receipts come in before suppliers are paid.
=9/Investment outlays, from which the company will benefit over several financial years as the product is being put onto the market.
=10/Expenditure should generate inflows over several financial periods.
=11/The inability to find additional resources to meet the company’s financial obligations.
=12/No. The risk is the borrowers’ failure to honour contracts either because of inability to repay due to poor business conditions or because of bad faith.
=1/Boomwichers NV Period n n+1 n+2 n+3 n+4 n+5 Operating inflows Operating outflows 165 165 200 175 240 180 280 185 320 180 360 190 Operating cash flows 0 25 60 95 140 170 Investments −200 0 0 0 0
=2/Ellingham plc exercise, see page 68.
=** Does purchasing an apartment make you richer or poorer?
=** Would your answer change if you were to buy the apartment on credit?
=5/In 2014, a company’s free cash flow turns negative. Has the company created or destroyed wealth?
=8/According to the terminology used in Chapter 2, is depreciation a cash outflow or a cost?What is the difference between these two concepts?
=10/Will repayment of a loan always be recorded on the income statement? Will it always be recorded under a cash item?
=11/Does the inflation-related increase in the nominal value of an asset appear on the income statement?
=12/Why is the increase in inventories of raw materials deducted from purchases in the bynature income statement format?
=13/Why is change in finished goods inventories recorded under income in the by-nature income statement format?
=15/Provide several examples illustrating the difference between cash receipts and revenues, cash expenses and costs.
=16/What is a non-cash expense? What is a deferred charge? Describe their similarities and the differences between them.
=1/Starjö AB You are asked by a Swedish company that assembles computers to draw up a by-nature and by-function income statement for year n. You are provided with the following information:Retail
=2/ Ellingham plc Draw up the income statement for 2014 in both the by-nature and by-function formats.Depreciation and amortisation come to €6m.
=3/Mumbai Oaks Consider an Indian business that sells oak barrels to vineyards. At the start of the year, its inventory of finished products was zero. It sold 800 of the 900 barrels it had produced,
=4/Singapore Kite Surf Magazine You want to launch the first kitesurfing monthly magazine in Singapore. The economics are the following:
=◦ for each issue you need to pay some friends for the articles ($2000 paid each month including social insurance charges);
=◦ the magazine will be sold only by subscription, you know the universe of buyers and you believe you can sell 1500 subscriptions (no additional sales are expected in the short term);
=◦ fabrication and delivery costs are $2 per magazine;
=◦ you believe you can sell the yearly subscription at $50;
=◦ you should benefit from income tax exemption for the first two years of operations.
=You launch your project in September. You close your accounts in December. What will your income statement and cash flow statement be for your first two financial years?
=How can you finance your project?
Company Bonaparte manufactures cigars. Its bonds mature at the end of 7 years, and pay 8% interest (paid annually) on a 100 face value. If an interest payment has just been paid and the required
A bond selling at a price higher than its face value should have:a. A coupon rate lower than the YTM.b. A coupon rate equal to the YTM.c. A coupon rate higher than the YTM.d. A coupon rate equal to
The Treasury has issued 10-year zero coupon bonds with a face value of $1,000. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is
Company Napoleon, a producer of French brandy, has issued 5-year bonds that pay a coupon of 6.375% annually. The current market rate for similar bonds is 8.5%. How much will you be willing to pay for
Josephine is a French boutique specialising in fashionable garments for young girls. The company has issued a 10-year bond with a 5% coupon rate annually. The bond has a face value of 1,000 and is
Company Hamilton has issued a 4-year bond with a face value of £1,000 that has a 5% coupon rate semi-annually ($50 semi-annually). If the yield to maturity on the bond is 12%, calculate the price of
Company Waterloo is a manufacturer of flushing toilets that sell predominantly in Japan. The company issues a 5-year bond with 5%coupon rate and £1,000 face value. The bond currently has a yield to
Which of the following statements is true?a. If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping.b. The real rate of interest varies with the
Which one of the following statements about bond prices is NOT true?a. The present value, or price, of the bond is the future value of its cash flows.b. To calculate a bond’s price, one needs to
A 5-year bond with a coupon rate of 8% has a face value of $1,000.What is the annual interest payment?a. $80b. 0c. $100d. None of the above
Which of the following are true statements?a. The “yield curve” is a curve that plots the structure of interest rates through time.b. The “term structure” of interest rates refers to the
Which of the following are true statements?a. The “redemption yield” and the “yield to maturity” of a bond are essentially the same.b. The “face value” of the bond and the “principal to
Which of the following are true statements?a. The “coupon rate” on the bond is the “interest rate” on the face value of the bond.b. The “coupon rate” on the bond is the “yield to
The prime ratea. Is the rate at which banks borrow and lend to each other.b. Is influenced by central banks by the rate the central bank offers on its accounts with the banking sector.c. Is generally
A finance company in the money markets might engage ina. Issuing commercial paper to raise funds.b. Lending funds to business.c. Pooling funds for investors in the markets while they consider their
When a loan is provided by the finance company to a business against the security of the accounts that the business holds receivable, we call thisa. Lease factoring.b. Accounts receivable
A central bank will issue Treasury bills in the money markets when it seeksa. To raise interest rates.b. To lower interest rates.c. Suppress inflation.d. a and c are true.
A “bill of exchange” is broadly equivalent toa. A “repo”.b. A C.D.c. A post-dated cheque.d. None of the above.
A “repo” in the financial markets refers toa. Repossession of the lender’s assets.b. Repossession of the borrower’s assets.c. A loan secured on the lender’s assets.d. A loan secured on the

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