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business
international financial management

Questions and Answers of International Financial Management

3 use the M&M model to determine a firm’s cost of capital and its market value;
4 understand the practical considerations influencing capital structure;
5 determine a firm’s financial, operating and total gearing.
Brewton Distillers has no debt in its capital structure. It has a cost of capital of 18 per cent and earnings before interest and taxes (EBIT)of £3m. Using M&M’s Proposition I (without taxes)
Brewton Distillers has no debt in its capital structure. It has a cost of capital of 18 per cent and earnings before interest and taxes (EBIT)of £3m.
Assuming the financial manager considers that a more appropriate capital structure for the company would be 30 per cent debt, 70 per cent equity, and that the company can borrow at 10 per cent, use
Using the previous data in Exercises 1 and 2 for Brewton Distillers and assuming a corporate tax rate of 30 per cent, calculate: (1) the market value of the all-equity company, and (2) the market
Applying M&M’s Proposition II (with taxes) to Brewton Distillers, calculate the company’s cost of equity.
Construct a table which shows clearly the total gearing (combined financial and operating gearing) position of Ajit’s Paints based on the sales scenarios presented in Example 7 together with the
1 How would you define the term ‘capital structure’? What is meant by the term‘optimal capital structure’?
2 What is the essence of the traditional model of capital structure?
3 (a) What are M&M’s propositions on capital structure? (b) State the assumptions of the M&M model, (c) How are these modified to take account of corporate taxes?
4 What is meant by the ‘trade-off’ model of capital structure?
5 Distinguish between the following:(a) agency costs and bankruptcy/financial distress costs;(b) financial gearing and operating gearing;(c) business risk and financial risk.
6 What are the main practical considerations which are likely to influence a firm’s capital structure?
7 M&M’s Proposition I. (a) Bramble Food Processors is debt-free, has earnings before interest and taxes (EBIT) of £2.5m and a cost of capital of 12 per cent.Calculate the market value of the
8 M&M’s Proposition II. (a) Winger Toys, a toy manufacturing company, has a bond on which it pays an interest rate of 9 per cent and a WACC of 18 per cent. If the financial manager informs you that
9 Financial Gearing. The financial manager of Eden Enterprises, a garden design and supply company, expects the business to have earnings before interest and taxes(EBIT) of £180,000 in the current
10 Operating Gearing. Eden Enterprises expects to generate sales of £700,000 in the current financial year. An analysis of the firm’s operating cost structure has revealed that variable operating
12 Capital Structure. The finance director of Netra plc, a company listed on the AIM(Alternative Investment Market) wishes to estimate what impact the introduction of debt finance is likely to have
1 explain the fundamentals of a firm’s dividend payment/earnings retention policy;
2 describe the main theories of dividend policy;
3 recognise the practical considerations which may influence dividend policy;
4 explain why firms repurchase shares and make special dividend payments;
5 appreciate the empirical evidence in relation to dividend policy.
If the share price for Cadbury Schweppes was 622p at the end of 1997, calculate the gross dividend yield for the year. Compare this with the yield for 1996 using a gross dividend of 21.25p and a
What do you consider might be the disadvantages or drawbacks of a residual dividend policy?
For the original shareholders of Green Isle Publishing, show how the transactions will affect their wealth, if at all, measured in terms of the asset value per share.
1 (a) What is the nature of a firm’s dividend decision? (b) How would you define the term ‘dividend policy’? (c) What is meant by the term ‘optimal dividend policy’?
2 (a) Describe the residual theory of dividend policy, (b) How is a residual policy likely to affect a firm’s dividend payments?
3 What are the essential characteristics of M&M’s dividend irrelevancy theory?
4 Briefly describe dividend signalling theory.
5 Explain how agency costs might influence dividend policy.
6 Summarise the practical considerations which are likely to influence a firm’s dividend policy.
7 Why do firms undertake share repurchase schemes?
8 (a) State four types of dividend policy commonly found in practice, (b) Why might a firm’s managers and shareholders prefer to have a stable dividend policy?
9 Dividend ratios. The Java Paper and Packaging Company has reported the following information for the financial year just ended.£m Turnover 20.67 Profit before tax 4.13 Taxation 1.24 Profit after
10 Evaluation of dividend policies. Energy Systems, a company which designs and manufactures sophisticated electronic energy control systems, has experienced a period of rapid growth in recent years.
11 Evaluation of dividend policy. Hiome plc has experienced a period of above average growth for its industry, but is now growing at the normal rate of about 10 per cent per year. The company’s
12 Evaluation of dividend policies. The board of directors of Deerwood plc are arguing about the company’s dividend policy.Director A is in favour of financing all investment by retained earnings
13 Evaluation of dividend policy, (a) Pavlon plc has recently obtained a listing on the Stock Exchange. Ninety per cent of the company’s shares were previously owned by members of one family but,
14 Evaluation of dividend policies and share repurchase. DIVS plc is a large international company with widespread interests in advertising, media and various consultancy activities associated with
1 Calculate the effect of each proposed structure on the company’s gearing (debt/ debt plus equity), earnings per share (EPS), dividend per ordinary share (DPS), interest cover, and total dividend
2 Using your findings in (1) above, discuss the advantages and disadvantages of each capital structure proposal.
3 Several directors have expressed a preference for a structure which substantially increases the company’s equity base and are currently in favour of adopting Proposal 1. Explain why you think the
4 One director has proposed using a rights issue and has suggested a one-for-four offer.(a) Briefly state the advantages to the company of making a rights issue.(b) Assume, for this part of the case
5 Which capital structure, if any, would you recommend the company to adopt? Give reasons for your recommendation.
1 understand the nature and role of financial planning and control;
2 describe the financial planning and control processes;
3 describe the benefits and drawbacks of business models;
4 discuss the role of computer-based planning models.
1 Briefly discuss the respective characteristics of strategic, tactical and operational planning and control.
2 (a) Outline the role of financial planning, (b) What are the two key elements in financial planning? (c) What do you understand by the term ‘scenario planning’?
3 Define the key elements of a management control system.
4 (a) What is a planning model? (b) Explain how a financial model is of use to the financial manager, (c) Discuss the advantages and disadvantages of computer-based financial modelling.
5 Financial modelling. You are a qualified accountant working as assistant to the Finance Director of a medium-sized company engaged in the manufacture of kitchen and bathroom furniture. In your
1 understand the nature and role of short-term financial management;
2 understand the nature and role of short-term financial planning and control;
3 explain the role of the sales forecast in financial planning;
4 explain the characteristics of short-term cash and profit planning;
5 construct and interpret a cash budget;
6 apply risk analysis techniques in cash planning;
7 construct and interpret a forecast profit and loss account, balance sheet, and cash flow statement;
8 appreciate the role of computer-based financial modelling.Icarus Publications is in the process of preparing its annual sales forecasts and has supplied you with the probability distribution for
Charts and Maps designs and manufactures a comprehensive range of aeronautical and nautical charts and maps. In the current year the company had actual sales of £296,000 during the month of July
If 15 per cent of the company’s sales are for cash, 50 per cent of the credit sales are paid one month after sale and the balance two months after sale, prepare a sales receipts schedule for the
1 What are the key characteristics of short-term financial management?
2 Explain the connection between short-term financial management and the goal of shareholder wealth maximisation.
3 (a) Outline the role of short-term financial planning, (b) Identify and briefly explain the two key elements in short-term financial planning.
4 (a) What is the objective of the cash budget? (b) Discuss two techniques for dealing with risk and uncertainty in the cash budget, (c) What would be the likely effects on a cash budget of the
5 (a) If the cash budget reveals that a firm is expected to have excess cash available for a number of months during the budget period, what investment opportunities are open to it? What criteria
6 Explain how a computer-based financial planning model is of use to the financial manager.
7 Cash budget. Jennifer’s Rock Solid Music Centre sells a wide range of music and entertainment media. Jennifer is concerned about her cash management and has asked for your help in preparing a
8 Forecast cash flow statement. Avionics Ltd manufactures and supplies electronic components to the aircraft industry. The company’s forecast profit and loss account together with a forecast
9 Forecasting, (a) Explain briefly why forecasting is a very important part of the planning and control process, and (b) what information should be considered when producing a sales forecast.10
11 Cash budget. International Golf Ltd operates a large warehouse selling golf equipment direct to the public by mail order and to small retail outlets. The cash position of the company has caused
12 Cash forecasting—risk analysis. Assume you are the financial manager about to prepare your company’s cashflow forecast for the next two years. You have been provided with forecasts about
13 Financial planning. Pulfer Ltd is a small company that has been operating for five years. It now employs 40 people, and turnover during the last financial year was£875,000. The board of directors
1 explain the nature and importance of working capital management;
2 explain and calculate the operating cycle;
3 understand the relationship between asset investment and asset turnover;
4 understand the risk-return relationship in working capital management;
5 compare and contrast the various types of working capital policy;
6 explain various systems of stock management;
7 calculate and manipulate the economic order quantity (EOQ) model.
The financial manager of Quantum Industries, a large chemical manufacturing company, is currently drafting the company’s financial plan for the coming year, starting on the first of January. The
The financial manager estimates that the average funding requirement for the year will be as follows:The financial manager estimates that a peak seasonal current asset investment of £6m will occur
If the cost of short-term finance is forecast at 7 per cent per year and long-term finance at 15 per cent per year, calculate the comparative costs of adopting a conservative or an aggressive working
The manager of Quantum Sports, a large sports and leisure wear store, estimates that the store will sell 5,000 pair of a new running shoe over the next year. If the cost of placing an order is
For Quantum Sports (see Exercise 2) it normally takes 3 days from ordering replacement stock for it to be delivered to the store.Calculate the reorder point. Assuming the manager wishes to carry a
1 (a) What do you understand by the term working capital? (b) Briefly explain how effective working capital management contributes to shareholder value.
2 What are the two key tasks involved in the management of working capital?
3 Explain the operating cycle. How does it affect the level of investment in working capital?
4 Summarise the key characteristics of the conservative, aggressive, and moderate working capital policies.
5 Explain what is meant by the optimal level of investment in current assets.
6 What are the underlying assumptions of the basic EOQ model?
7 How can outsourcing contribute to effective working capital management?
8 Stock turnover. From the information set out below, calculate the stock turnover ratio and average inventory days for Harry’s Bar and Restaurant for both the current and previous years:Current
9 The operating cycle. On average it takes 10 days for raw materials to be delivered to the Brandon Clothing Company from the time of ordering. When received at the factory raw materials are usually
10 EOQ and Reorder point, (a) The City Bakery uses 10,800 kilogrammes of dried fruit ingredients per year. If ordering costs are £10 per order and the carrying cost is£5 per kilogramme per year,

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