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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

Amsterdam Ltd and Berlin Ltd are both engaged in retailing, but they seem to take a different approach to it according to the following information:Ratio Amsterdam Ltd Berlin Ltd Return on capital
Conday and Co. Ltd has been in operation for three years and produces antique reproduction furniture for the export market. The most recent set of financial statements for the business is set out as
The directors of Helena Beauty Products Ltd have been presented with the following abridged financial statements:Helena Beauty Products Ltd Income statement for the year ended 30 September 2007
Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2007 and 2008 are as follows:Income statements for the year ended 30 June
Genesis Ltd was incorporated in 2005 and has grown rapidly over the past three years. The rapid rate of growth has created problems for the business, which the directors have found difficult to deal
l Use each method to reach a decision on a particular investment opportunity.
The payback method has been criticised for not taking the time value of money into account.
Could this limitation be overcome? If so, would this method then be preferable to the NPV method?
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects.Both projects are concerned with the purchase of new plant. The following data are available for each
Arkwright Mills plc is considering expanding its production of a new yarn, code name X15. The plant is expected to cost £1 million and have a life of five years and a nil residual value. It will be
The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed
C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances.The manufacturing process is, at present, semi-automated. The equipment used costs£540,000, and
Newton Electronics Ltd has incurred expenditure of £5m over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed, and the directors are
Chesterfield Wanderers is a professional football club that has enjoyed considerable success in both national and European competitions in recent years. As a result, the club has accumulated£10m to
Haverhill Engineers Ltd manufactures components for the car industry. It is considering automating its line for producing crankshaft bearings. The automated equipment will cost £700,000.It will
l Explain the modifications needed to the simple NPV decision rules where there is capital rationing or where there are competing projects with unequal lives.
l Discuss the effect of inflation on investment appraisal and explain how inflation may be taken into account.
l Discuss the nature of risk and explain why it is important in the context of investment decisions.
l Describe the main approaches to the measurement of risk and discuss their limitations.
There is evidence to suggest that some businesses fail to take account of inflation in investment decisions. Does it really matter given that, in recent years, the level of inflation has been low?
What would be the effect on NPV calculations (that is, would NPV be overstated or understated)of dealing with inflation incorrectly by (a) discounting nominal cash flows at real discount rates and
Lee Caterers Ltd is about to make an investment in new kitchen equipment. It is considering whether to replace the existing kitchen equipment with cook/freeze or cook/chill technology.The following
D’Arcy (Builders) Ltd is considering three possible investment projects: A, B and C. The expected pattern of cash flows for each project is:Project cash flows A B C£000 £000 £000 Initial outlay
Simonson Engineers plc is considering the building of a new plant in Indonesia to produce products for the South-east Asian market. To date, £450,000 has been invested in market research and site
Helena Chocolate Products Ltd is considering the introduction of a new chocolate bar into their range of chocolate products. The new chocolate bar will require the purchase of a new piece of
Devonia (Laboratories) Ltd has recently carried out successful clinical trials on a new type of skin cream which has been developed to reduce the effects of ageing. Research and development costs
Nimby plc is considering two mutually exclusive projects: Delphi and Oracle. The possible NPVs for each project and their associated probabilities are as follows:Delphi Oracle NPV Probability of
l Identify the main sources of external finance available to a business and explain the advantages and disadvantages of each source.
l Identify the main sources of internal finance available to a business and explain the advantages and disadvantages of each source.
l Discuss the factors to be taken into account when choosing an appropriate source of finance.
What are share warrants and what are the benefits to a business of issuing share warrants?‘Convertible loan capital is really a form of delayed equity.’ Do you agree? Discuss.
What are the benefits of an interest swap agreement and how does it work?
Distinguish between invoice discounting and debt factoring.
Answer all parts below.Required:Provide reasons why a business may decide to:(a) Lease rather than buy an asset which is to be held for long-term use.(b) Use retained profit to finance growth rather
H. Brown (Portsmouth) Ltd produces a range of central heating systems for sale to builders’merchants. As a result of increasing demand for the business’s products, the directors have decided to
Securitisation is now used in a variety of different industries. In the music industry, for example, rock stars such as David Bowie, Michael Jackson and Iron Maiden have used this form of financing
Raphael Ltd is a small engineering business that has annual credit sales revenue of £2.4 million.In recent years, the business has experienced credit control problems. The average collection period
Cybele Technology Ltd is a software business that is owned and managed by two computer software specialists. Although sales have remained stable at £4 million per year in recent years, the level of
Telford Engineers plc, a medium-sized Midlands manufacturer of automobile components, has decided to modernise its factory by introducing a number of robots. These will cost £20 million and will
Gainsborough Fashions Ltd operates a small chain of fashion shops in North Wales. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken
l Calculate the weighted average cost of capital for a business and assess its usefulness when making investment decisions
l Calculate the degree of financial gearing for a business and explain its significance.
l Evaluate different capital structure options available to a business.
l Explain the key points in the debate over whether a business has an optimal capital structure.
How might a business find out whether a particular planned level of gearing would be acceptable to investors?
Should the specific cost of raising finance for a particular project be used as the appropriate discount rate for investment appraisal purposes?
Riphean plc and Silurian plc are two businesses operating in different industries from one another. They are both financed by a mixture of ordinary share and loan capital and both are seeking to
Celtor plc is a property development business operating in the London area. The business has the following capital structure as at 30 November Year 9:£000£1 ordinary shares 10,000 Retained earnings
Grenache plc operates a chain of sports shops throughout the UK. In recent years competition has been fierce and profits and sales have declined. The most recent financial statements of the business
Ashcroft plc, a family-controlled business, is considering raising additional funds to modernise its factory. The scheme is expected to cost £2.34 million and will increase annual operating profits
Hatleigh plc is a medium-sized engineering business based in South Wales. The financial statements for the year ended 30 April 2008 are as follows:Statement of financial position (balance sheet) as
Jubilee plc operates four wholesale food outlets in Scotland. After several years of sales and profits growth the business has recently experienced some financial problems. The financial statements
Tariq is the credit manager of Heltex plc. He is concerned that the pattern of monthly cash receipts from credit sales shows that credit collection is poor compared with earlier forecasts.Heltex’s
How might each of the following affect the level of inventories held by a business?(a) An increase in the number of production bottlenecks experienced by the business.(b) A rise in the level of
Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent income statement and statement of financial position of the business are as
International Electric plc at present offers its customers 30 days’ credit. Half the customers, by value, pay on time. The other half take an average of 70 days to pay. The business is considering
The managing director of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year:Sparkrite Ltd Income statements for years ended 30
Your superior, the general manager of Plastics Manufacturers Limited, has recently been talking to the chief buyer of Plastic Toys Limited, which manufactures a wide range of toys for young children.
Mayo Computers Ltd has annual sales of £20m. Bad debts amount to £0.1m a year. All sales made by the business are on credit, and, at present, credit terms are negotiable by the customer.On average,
Boswell Enterprises Ltd is reviewing its trade credit policy. The business, which sells all of its goods on credit, has estimated that sales revenue for the forthcoming year will be £3m under the
Delphi plc has recently decided to enter the expanding market for minidisc players. The business will manufacture the players and sell them to small TV and hi-fi specialists, medium-sized music
l Discuss the role of the finance function within a business.
l Identify and discuss possible objectives for a business and explain why shareholder wealth maximisation is considered to be the most appropriate.
l Explain how risk and ethical considerations influence the pursuit of shareholder wealth maximisation.
l Describe the agency problem and explain how this problem may be dealtwith.
What are the main functions of the finance function within a business?
Why is the maximisation of wealth viewed as superior to profit maximisation as a business objective?
Some businesses try to overcome the agency problem referred to in the chapter by using an incentive scheme that is based on the growth of profits over a period. What are the drawbacks of this type of
How did the term working capital originate?AppendixL01
What does maturity matching mean, and what is the advantage of this financing policy?AppendixL01
What are advantages and disadvantages of short-term versus long-term debt as identified in this section?AppendixL01
How could the cash budget be used when the terms of a bank loan are negotiated?AppendixL01
What are credit terms?AppendixL01
CASH CONVERSION CYCLE Primrose Corp has $15million of sales, $2million of inventories,$3 million of receivables, and $1 million of payables. Its cost of goods sold is 80% of sales, and it finances
RECEIVABLES INVESTMENT Lamar Lumber Company has sales of $10 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are$2 million. What is Lamar’s
COST OF TRADE CREDIT AND BANK LOAN Lamar Lumber buys $8 million of materials(net of discounts) on terms of 3 5, net 60; and it currently pays on the 5th day and takes discounts. Lamar plans to
Define the terms “book-value capital structure,” “market-value capital structure,”and “target capital structure,” and explain why they differ from one another.AppendixLO1
Would the market-value debt ratio tend to be higher than the book-value debt ratio during a stock market boom or a recession? Explain.AppendixLO1
Why would the WACC based on market values tend to be higher than the one based on book values if the stock price exceeded its book value?AppendixLO1
Which would you expect to be more stable over time, a firm’s book-value or market-value capital structure? Explain.AppendixLO1
What is operating leverage?AppendixLO1
Explain this statement: Using financial leverage has both good and bad effects.AppendixLO1
What happens to the component costs of debt and equity when the debt ratio is increased? Why does this occur?AppendixLO1
Using the Hamada equation, explain the effects of financial leverage on beta.What is the equation for calculating a firm’s unlevered beta?AppendixLO1
Use the Hamada equation to calculate the unlevered beta for FirmXwith the following data: bL = 1.25, T = 40%,Debt/Capital = 0.42, and Equity/Capital = 0.58. (bU = 0.8714)AppendixLO1
What would be the cost of equity for Firm X at Equity/Capital ratios of 1.0(no debt) and 0.58 assuming that rRF = 5% and RPM = 4%? (8.49%, 10%)AppendixLO1
Using a graph and illustrative data, discuss the premiums for financial risk and business risk at different debt levels. Do these premiums vary depending on the debt level? Explain.AppendixLO1
Is expected EPS generally maximized at the optimal capital structure? Explain.AppendixLO1
Why does MM’s theory with taxes lead to 100% debt?AppendixLO1
How would an increase in corporate taxes tend to affect an average firm’s capital structure? What about an increase in the personal tax rate?AppendixLO1
Explain what asymmetric information means and how signals affect capital structure decisions.AppendixLO1
What is the pecking order hypothesis, and how does it influence firms’ capital structures?AppendixLO1
How do “windows of opportunity” impact a firm’s capital structure?AppendixLO1
How do the attitudes of lenders and rating agencies affect capital structure?AppendixLO1
What is financial flexibility, and is it increased or decreased by a high debt ratio?Explain.AppendixLO1
KEY TERMS Define each of the following terms:a. Capital; capital structure; optimal capital structureb. Business risk; financial riskc. Financial leverage; operating leverage; operating breakevend.
OPERATING LEVERAGE AND BREAK-EVEN ANALYSIS Olinde Electronics Inc. produces stereo components that sell at P = $100 per unit. Olinde’s fixed costs are $200,000, variable costs are $50 per unit,
OPTIMAL CAPITAL STRUCTURE Carlisle Industries is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it
Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverage? Explain your answer.AppendixLO1
Would each of the following increase, decrease, or have an indeterminant effect on a firm’s break-even point (unit sales)?a. The sales price increases with no change in unit costs.b. An increase in

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