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business
multinational business finance

Questions and Answers of Multinational Business Finance

What is the value of a European call on U.S. dollars with an exercise price of ¥100/$ and a maturity date six months from now if the current spot rate is and the continuously compounded risk-free
Using one year (252 trading days) of historical data, you have estimated a daily standard deviation of percent for the exchange rate:a. What is the annual standard deviation of the exchange rate if
Suppose the spot rate is ¥105/$ and there is an equal chance that it will fall to or rise to . To what continuously compounded rates of return do these changes correspond?
Suppose the yen value of a dollar is ¥100/$ and that this exchange rate has an equal probability of moving to either or ¥110.517/$ in one period. To what continuously compounded rates of return do
Section 6.3 used graphs to show how volatility affects the time value of out-of-the-money, at-the-money, and in-the-money call options. Use similar graphs to show how volatility affects the time
Construct an option position (i.e., some combination of calls and/or puts) with the same risk profile ( versus ) as a forward contract to buy A$ at a forward price of. Use both words and graphs.a.
Based on the prices and exchange rates in Problem 6.1 and 6.2, use graphs to show how a short pound call is equivalent to a short krone put.
Based on the information in Problem 6.1, draw the payoff profile for a long krone put option at expiration. Note that these exchange rates are reciprocals of those in Problem 6.1.£/DKK spot exchange
You work at the currency desk at Barings Bank in London. As the middleman in a deal between the U.K. and Danish governments, you have paid £1,000,000 to the U.K. government and have been promised
What determines the intrinsic value of an option? What determines the time value of an option?
In what sense is a currency forward a combination of a put and a call?
assuming (1)percent and percent, (2) percent and percent, and (3) percent and percent.b. Suppose interest rates do not change (so that percent and ) but that the spot exchange rate does change. Fill
Refer to Exhibit 5.6. It is now March 13 and the current spot exchange rate between U.S. dollars ($) and Singapore dollars(S$) is $0.6010/S$. You have a S$10 million obligation due on October 26. The
You work for U.S.-based Google and are considering ways to hedge a 10 billion Danish kroner (DKK) obligation due in six months. Your currency of reference is the U.S. dollar. The current value of the
Suppose Cotton Bolls does business with companies in Israel and Singapore. Cotton Bolls expects to pay 500,000 new Israeli shekels (ILS) and receive 125,000 Singapore dollars on the Friday before the
On September 11, a U.S.-based MNC with a customer in Singapore expects to receive S$3 million. The current spot exchange rate is . The transfer will occur on December 10. The current S$ futures price
Suppose that at time zero the spot rate equals the 90-day forward rate at . Assume that the spot rate increases by $0.0002/S$ each day over the ensuing 90 days. You buy Singapore dollars in both the
Supertraders Ltd is experiencing severe liquidity problems, which you, as a business consultant, have been asked to investigate. You have identified the problem as being caused principally by a very
North Anglia Engineering Ltd (NAE), a manufacturing business, has recently obtained the financial statements of some of its industry rivals and has discovered that it holds, on average, twice the
Antithesis Ltd sells its service on credit at the rate of £6m a year. Customers take varying lengths of time to pay, but the average is 65 days. The business does not experience any significant
Dixon plc uses a component, which it buys in from a supplier, in its manufacturing process. The estimated annual usage is 23 000 units, and these are used fairly steadily throughout the year. It is
In what ways is the basic stock reorder model deficient in representing reality?
How is ‘obsolescence’ a cost of holding stock?
Why is working capital a particularly important area of concern for financial managers?
A business plans to use £20 000 of cash during the forthcoming year. It holds most of its cash in a deposit account from which it costs £30 to make each withdrawal and which pays interest at 10 per
Economic order quantity A business uses 1000 units of a particular stock item each year. The costs of holding one unit of it for a year are £3 and the cost of placing each order is £30. What is the
The management of Memphis plc (Problem 8.4) is reconsidering its decision on the rights issue price. It is now contemplating an issue price of £1 per new share. One of its concerns is the effect
Memphis plc has 20m £0.10 ordinary shares in issue. On 7 June the stock market closing price of the shares was £1.20. Early on the morning of 8 June, the business publicly announced that it had
Polecat plc has 18m £0.50 ordinary shares in issue. The current stock market value of these is £1.70 per share. The directors have decided to make a one for three rights issue at £1.25 each.Julie
Many businesses issue loan stocks, which carry the right for holders to convert them into ordinary shares in the same business at a later date.Why might a business choose to issue convertible loan
What factors tend to affect the market value of a particular convertible loan stock?(Note that the answer to this question is not really provided in the chapter. A combination of background knowledge
A loan stock, listed on the stock market, has a ‘coupon’ rate (interest rate specified in the contract between the business and the lenders) of 10 per cent. Does this necessarily mean that the
If retained profits are not a free source of finance, why are they nonetheless such a popular source of finance?
Why are retained profits not a free source of finance?
An investor has £100 nominal value of perpetual (irredeemable) loan stock, which has a coupon rate (the rate that the borrowing business is contracted to pay on the nominal value of the stock) of 6
A business wishes to issue 10m shares by tender. After publishing the advertisement in the required form it receives offers as follows:1m shares at £5.00 each (that is, offers for 1 million shares
Tufty plc produces a small range of industrial pumps using automated methods. The business is now considering production of a new model of pump, starting on 1 January 20X3. The business wishes to
Focus plc has several wholly owned subsidiaries engaged in activities that are outside the business’s core business. A decision has recently been taken to concentrate exclusively on the core
In problem 6.1, assume that the 2000 level is the ‘best estimate’ of annual demand for Easton Ltd, and that only Machine A is available.(a) Should the business acquire Machine A on the basis of
Which two assumptions need to be made if the expected value/variance criterion of investment decision making is to be applied?
What are the limitations of the results of a sensitivity analysis such as the one carried out in Example 6.1 (Greene plc)?
Still staying with the data in Example 6.1, let us assume not only that the sales volume has the same three possible outcomes, but that, independent of the sales volume, the cost of labour will be:l
Using the data from Example 6.1, let us assume that all the factors are known with certainty(impossible in real life) except sales volume.Extensive market research suggests that annual demand will
Greene plc has the opportunity to invest in plant for the manufacture of a new product, the demand for which is estimated to be 5000 units a year for five years. The following data relate to the
Arthur Graham plc (AG) is a Stock Exchange listed business that owns a chain of builders’ merchants throughout the south of England. AG is currently financed principally by equity, as a result of
Cavendish plc is a Stock Exchange listed business whose main activity is producing a low-value material used in large quantities in the building/construction industries.Production is such that a
Ali plc is a Stock Exchange listed business. It is all-equity financed by 40m 25p ordinary shares, which are currently quoted at £1.60 each. In the recent past, annual profit has been an average of
Mile Long Merchants Limited (MLM) runs two small supermarkets. MLM’s equity is owned entirely by members of the Long family.The directors are keen to open an additional supermarket. The cost of
Particulate plc is an all-equity financed business with a market value of £35m and a cost of capital (after tax) of 20 per cent p.a.The business intends to purchase and cancel £8m of equity finance
Merlot plc is financed by 10m shares, whose current market value is £2.40 a share, and 10 per cent debentures with a nominal and market value of £14m. The business plans to issue additional shares
Shiraz plc is financed by 10m shares, whose current market value is £2.40 a share, and 10 per cent debentures with a nominal and market value of £14m. The return on the ordinary shares is 20 per
One of the MM assumptions is ‘no bankruptcy costs’. What costs does this phrase represent?
Why is loan finance usually cheaper than equity finance in the same business?
Penney Products plc has a manufacturing plant devoted exclusively to production of one of the business’s products, a toy known as Zapper. The product is produced only at this factory. Recently
Mega Builders plc (Mega), a civil engineering contractor, has been invited to tender for a major contract. Work on the contract must start in January 20X6 and be completed by 31 December 20X7. The
When inflation is predicted over the life of a project under assessment, there are two approaches to dealing with inflation. What are these? Which is the better one to use?
‘Depreciation is taken into account when deducing profit (in the profit and loss account), but ignored in NPV assessments. If both accounting profit and NPV are meant to be decision-making tools,
Wessex Mining owns a site in Dorset on which there is an oil well. The business does not pump oil any longer because the price of oil is such that it is not economic to do so.Furthermore, projections
A business owns a fleet of identical motor vehicles. It wishes to replace these vehicles after either three or four years. Each one costs £10 000 to replace with a new vehicle. If the business
XYZ Ltd, an unlisted business, is quite like ABC plc, a listed one, in term of activities, gearing and dividend policy. XYZ Ltd recently paid a dividend for the year of £0.20 per share. The
What is wrong with using the balance sheet values of assets and claims when deducing the value of the shares of a small business?
A plc and B Ltd are two businesses similar in size, activity, gearing and dividend cover. A plc is Stock Exchange listed, B Ltd is not. The dividend yield (gross) for A plc is 10 per cent, and B Ltd
Butterworth plc is a UK listed business. For many years it has paid an annual dividend, on its ordinary shares, that was 8 per cent higher than that of the previous year. The market expects that this
Breadwinner plc, a £500m market value, all-equity financed listed business, has been in the habit of making just one dividend payment each year. The business has just paid a dividend of 21p a share.
The directors of Bellini plc, a Stock Exchange listed business, are contemplating purchasing some of its own shares in the market, and cancelling them, as an alternative to paying a dividend. Some of
HLM plc, an all-equity financed business, has just paid a dividend totalling £1.5m.This amount has been paid on a regular basis for many years, and the market expects this to continue. The business
The shareholders of Distributors plc have an opportunity cost of capital of 20 per cent. The business makes a steady profit of £25m each year, which is all paid out as a dividend. The opportunity
What are ‘homemade dividends’ in the context of MM? Why might a shareholder want such a dividend?
White plc has net assets whose net present value is £5m. This includes cash of £1m, which the directors have identified could be invested in a project whose anticipated inflows have a present value
Doverdale plc has some convertible loan stock, with a current market value of £109 per £100 nominal value, on which it will pay interest at the rate of 12 per cent on their nominal value in one
Shah plc has a cost of equity of 17 per cent p.a. The business is expected to pay a dividend in one year’s time of £0.27 per share. Dividends are expected to grow at a steady 5 per cent each year
Gregoris plc has some loan stock, currently quoted at £104 per £100 nominal value.This stock will pay interest at the rate of 8 per cent p.a. of the nominal value at the end of each of the next
When deducing the cost of equity through a dividend model, must we assume either a constant level of future dividends or a constant level of growth of dividends? Explain your response.
When calculating the weighted average cost of capital (WACC), should we use market values or balance sheet values as the weights of debt and equity? Explain your response.
What is wrong with using the cost of the specific capital used to finance a project as the discount rate in relation to that project?
Why does it seem likely that businesses have a ‘target’ gearing ratio?
If we know the projected cash flows from a loan stock and its current market value, what approach would we take to deducing the cost of the loan stock?
What determines the value of an economic asset (as opposed to an asset that has value for reason of sentiment)?
Calculation of WACC Hazelwood plc is financed by:(a) 1 million ordinary shares (nominal value £1 each), which are expected to yield a dividend of £0.10 per share in one year’s time; dividends are
A convertible loan stock of Tower plc currently trades in the capital market at £140 per £100 nominal. The stock pays annual interest of £11 per £100 nominal and may be converted in exactly five
A business’s ordinary shares are currently trading at £2.00 (ex dividend) each in the capital market. Next year’s dividend is expected to be £0.14 per share, and subsequent dividends are
A loan stock that was originally issued at par is currently quoted in the capital market at£93 per £100 nominal value, repayment of the nominal value in full is due in exactly five years’ time,
You have overheard the following statement: ‘According to modern portfolio theory, shares are priced on the basis of their systematic riskiness. This means, therefore, that a piece of bad news
Modern portfolio theory tends to define risky investments in terms of just two factors:expected returns and variance (or standard deviation) of those expected returns.What assumptions need to be made
Is exploitation of customers by a monopoly supplier, who charges very high prices, consistent with the objective of maximising shareholders’ wealth? Explain your response.
Why, in practice, would borrowing by the business to raise cash to pay a dividend not be economically equivalent to borrowing by the individual shareholders to provide themselves with cash?(Note that
Talco Ltd undertakes research work. It also manufactures engineering products. It is currently engaged on a research project which, when completed, will be sold for£250 000. So far, costs totalling
What is a balance sheet? Does the balance sheet tell us how much the business is worth?
The first entry in the standard-layout cash flow statement is ‘cash flow from operating activities’. How is this figure different from the net profit before interest and tax for the same period?
People often refer to a business as having a ‘strong balance sheet’. What do they mean by this?(Note that the answer to this question is not really provided in the chapter. However, a combination
The quick assets ratio is not included in Taffler’s Z-score model for identifying potentially failing businesses. Why is this?(Note that the answer to this question is not really provided in the
The following are the highly simplified financial statements of Duration Ltd for last year:Calculate as many accounting ratios as the information provided will allow. Turnover Profit and loss account
The following are the financial statements of Persona Ltd for last year and this year:Calculate the following ratios for both years:○ Return on net assets ○ Return on equity ○ Gross profit
The following is the balance sheet (in abbreviated form) of Projections Ltd for last year:The following plans have been made for next year:1 Sales revenue is expected to total £350 000, all on
The following are the financial statements of Prospect plc for last year and this year:l Return on net assets l Return on equity l Gross profit margin l Net profit margin l Stockholding period l
The following are the financial statements of High Street Enterprises plc for last year and this year:Calculate the suitable financial ratios for High Street Enterprises plc for last year and this
Turners Ltd is considering the purchase of a new machine that is expected to save labour on an existing project. The estimated data for the two machines available on the market are as follows:Which
RTB plc has recently assessed a potential project to make and sell a newly developed product. Two possible alternative systems have been identified, either one of which could be used to make the
Cantelevellers plc’s primary financial objective is to maximise the wealth of its shareholders.The business specialises in the development and assembly of high quality television sets. It normally
Cool Ltd’s main financial objective is to maximise the wealth of its shareholders. Cool specialises in providing a service for its clients. All of the work that it undertakes is of a similar type

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