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international financial management

Questions and Answers of International Financial Management

4 Ignore depreciation in cash flow calculations. Depreciation is not a cash flow expense.
5 Ignore financing costs in any cash flows as these are already incorporated within the project’s discount rate. For our purposes here (although it is not always the case)the investment decision is
6 Take account of any changes to working capital investments. Any increased investment in working capital is treated as a cash outflow, conversely any reduced investment in working capital is treated
7 Take account of any opportunity costs. How does the project impact on the use of existing resources? Will some other cash flows, actual or potential, be lost as a result of investing in this
8 Look for any synergistic, ‘spin-off’ or incidental effects. How will the new project impact on existing operations? Will it complement or substitute, even partially, existing operations? For
9 Beware of any reallocation of overheads from existing services, such as the reallocation of existing management salaries or head office overheads. These costs would be incurred whether the project
Evaluate the investment proposal for Illusions Ltd using the investment appraisal techniques we have just examined. For ease of reference the information on the Illusions proposal is reproduced below.
Illusions Ltd is a small firm specialising in the creation of special effects for the film and television industry. Management is considering an investment proposal to upgrade existing services in
1 (a) Spending money now which will result in benefits within one year represents a ______ expenditure.(b) Spending money now which will result in benefits beyond one year represents a ______
2 Indicate which of the following are capital or revenue expenditures:(a) A payment of £30,000 to purchase a fast food franchise;(b) A new delivery vehicle at a cost of £20,000;(c) New tyres for
3 (a) Briefly state the reasons for investment decisions, (b) What is meant by‘intangible investments’? (c) Distinguish between mandatory and discretionary investments, (d) Summarise the
4 Explain the principal stages involved in the investment appraisal process.
5 ‘When evaluating investment projects the net present value (NPV) and internal rate of return (IRR) always suggest the same accept/reject decision.’ What, if anything, is wrong with this
6 Investment Appraisal Techniques—Various. The management of Comfy Hotels Ltd is attempting to evaluate the feasibility of investing £125,000 in upgrading and extending its bar, kitchen and dining
7 Investment Appraisal Techniques—Mutually Exclusive Options. Meadowvale Hospital is attempting to choose the better of two mutually exclusive options to expand theatre operating capacity. The data
8 Investment Appraisal Techniques—Various. Sunnyvale Enterprises plc is involved in the production and distribution of milk products, natural and processed cheeses and dairy spreads. The company
9 Investment Appraisal Techniques—Mutually Exclusive Options. Clinical Diagnostics, a medical services company, wishes to invest in new medical diagnostic technology. Management is considering the
10 Payback. Identify the major limitations of the payback method of project appraisal and suggest reasons why it is widely used by companies.
11 Investment Appraisal—General. You are the chief accountant of Deighton plc, which manufactures a wide range of building and plumbing fittings. It has recently taken over a smaller unquoted
1 understand the impact of risk on investment decisions;
2 explain and apply the main methods of risk evaluation in investment decisions;
3 appreciate the limitations of risk evaluation methods; and
4 specify approaches to risk reduction.
MJM Enterprises, a health food manufacturing company, is considering an investment project to introduce a new range of products. You have been provided with the following information:The project has
1. Calculate the base case NPV for the project.
2. Test the project’s sensitivity to key variable changes as follows:(a) ±5% change in annual sales revenue;(b) ±5% change in annual operating costs.
3. To which variable, sales or costs, do you consider the NPV to be more sensitive? Comment on your findings.
The management of Greenfield Equestrian Centre and Stud Farm is considering the following investment project to develop the business.The forecast NPVs and their assigned probabilities are as
1 Distinguish between risk and uncertainty in the context of investment appraisal.
2 Define the following terms:(a) Stand-alone risk.(b) Corporate risk.(c) Market risk.
3 Summarise the respective limitations of the following risk analysis techniques:(a) Sensitivity analysis.(b) Simulation.
4 Compare and contrast the certainty equivalent and risk-adjusted discount rate(RADR) approaches to project risk analysis.
5 Sensitivity Analysis. Illusions Ltd is a small firm specialising in the creation of special effects for the film and television industry. Management is considering an investment proposal to upgrade
2. Net Present Value Year Net Cash Flow £ × Discount Rate (10%) = PV £0 (235,000) 1.000 (235,000)1–10 40,000 6.145 245,800 10 5,000 0.386 1,930 NPV = 12,730 Evaluate the effect on the
6 Scenario Analysis. The Leaning Tower of Pizza restaurant is attempting to decide which of two new mutually exclusive environmental control systems, A or B, it should install. Each system will
7 Certainty Equivalents. The management of Illusions Ltd has developed the following range of certainty equivalent factors for the project’s cash flows:Year t Net Cash Flow £ Certainty equivalent
8 RADR and Risk Classes. Andover Industrial Products is considering in which of the following three, mutually exclusive, projects it should invest. All projects have equal lives but differ in risk.
9 Sensitivity Analysis. Scenic Systems designs and manufactures specialist bathroom fittings. The company’s management is considering a proposal to manufacture and market a new shower systems
1 understand the meaning of the term cost of capital;
2 explain the factors which influence a firm’s cost of capital;
3 determine the cost of debt capital;
4 determine the cost of equity capital;
5 understand and apply the concept of the weighted average cost of capital (WACC);
6 recognise the limitations of the weighted average cost of capital (WACC);
7 appreciate other methods of calculating a risk-adjusted cost of capital.
Sunny Sky Ventures plc has in issue £100 par value debentures with a coupon rate of 10 per cent paid annually. The debentures, which are currently trading at £109, are redeemable at par in 10 years
Sunny Sky Ventures plc has in issue £100 par value irredeemable debentures with a coupon rate of 7 per cent paid annually. Find the cost of the debentures assuming a current market value of £96 and
The directors of WeatherAll Engineering estimate the dividend for next year at £0.46 per share and expect future dividends to grow at a constant 3 per cent per year. Assuming the current market
WeatherAll Engineering currently has an equity beta, β, of 1.1.Assuming a risk-free rate, Rf, of 7 per cent and a market return, ERm, of 15 per cent, calculate the cost of equity using the CAPM.
1 How would you define the term ‘cost of capital’? Briefly explain its role in financial decision-making.
2 What are the main factors which will influence a company’s cost of capital?
3 Why is the cost of debt capital calculated on an after-tax basis?
4 Discuss the relative advantages and disadvantages of using the constant dividend growth model and the capital asset pricing model (CAPM) to determine the cost of equity.
5 (a) Describe the weighted average cost of capital (WACC) and how it is calculated,(b) What are the limitations of using the WACC as a discount rate in investment appraisal?
6 Cost of Redeemable Debt. Carolynco Textile Systems has in issue 200,000 £100 par value bonds with a coupon rate of 14 per cent paid annually. The bonds have 20 years to maturity. Find the cost of
7 Cost of Preference Share Capital. Jain Medical Systems has in issue 2 million£5.00 par value irredeemable 7 per cent preference shares. Find the cost of the preference shares assuming they are
8 Cost of Equity Share Capital. The dividend per share (DPS) paid by the directors of Carolynco Textile Systems over the period 1994 to 1999 is presented below.Year Dividend per Share (DPS)1999
9 Cost of Equity Share Capital—CAPM. Carolynco Textile Systems has an equity beta, β, of 1.21. The risk free rate, Rf, is currently 7 per cent and the market return, ERm, is 14 per cent. Use this
10 WACC. Carolynco Textile Systems has recently issued £20 million of 20-year bonds at £100 par value which are currently trading at £96 with a current yield of 14.67 per cent. The company
11 Cost of Individual Sources of Capital and WACC. Details of the capital structure of Celtic Enterprises, a specialist printing company, are as follows:£m Ordinary share capital (£1 ordinary
12 Cost of Capital—Various. The following is an extract from the balance sheet of Leisure International plc at 30 June:£Ordinary shares at 50p each 5,200 Reserves 4,850 9% preference shares at £1
The ordinary shares are quoted at 80p. Assume that the market estimate of the next ordinary dividend is 4p, growing thereafter at 12% per annum indefinitely. The preference shares, which are
With the assistance of a firm of management consultants the directors of Ocean Blue Hotel, a profitable company in the hotel and leisure industry, are currently considering an expansion project to
In the business plan the consultants’ estimate of club membership is as follows:The consultants also estimate membership fees as follows:No. of members Probability of occurrence Year 1 Year 2
1 understand the meaning of capital structure;
2 explain the various models of capital structure;
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.

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