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business
principles corporate finance
Questions and Answers of
Principles Corporate Finance
Why would a company with an 85% stake in a subsidiary launch a takeover bid for the remaining 15%?
Provide a description of the shareholdings and management in the following situations:◦ Company 1: capital split between investors each holding the blocking minority;◦ Company 2: large group
Which financial theory best explains the development of corporate governance?
Why has corporate governance mainly developed at listed companies?
How do stock options help in aligning the interests of managers with those of shareholders? What are their limitations?
Name a firm where practically all of the directors were independent, which did not prevent it from experiencing severe financial difficulties in 2002, the result of a lack of control over managers.
What is the danger when a board has specialised committees?
What should an overworked director who has only been able to attend every other board meeting do?
What is the most important – an independent director, a hardworking director, a competent and courageous director? What is the ideal?
In which countries is it more important for a firm to have a system of corporate governance in place?
What is the link between corporate governance and the cost of capital?
Does the regular rotation of a firm’s statutory auditors improve corporate governance?
Is corporate governance relevant at companies over which the state exercises full control?
What are your views on a firm that replaces its one-tier board with a two-tier board and then, a few years later, reverts to a one-tier board, like Suez did, or which asks its chief executive officer
Is it a good idea, with a view to providing directors with better information, for the auditor to be a director of the company as well?
What are the pros and cons of separating the position of chairman of the board from that of CEO?
What are the advantages and drawbacks of private negotiation?
What are the advantages and drawbacks of a private sale by auction?
What is the advantage of a public purchase or share exchange offer for a minority shareholder?
What advantages does a public offer have for the acquirer over an acquisition on the market? What are the drawbacks?
Can a company launch an offer to buy another company that is for sale without having any real intention of closing the deal? Why? What protection is there for the seller?
What will be key to make an M&A deal a successful event in a company history?
Why are earnout clauses so popular with companies in the service sector?
All things being equal, what is the downside of a deal being kept highly confidential?
When is it a good idea to go for a private auction?
How can a buyer be protected against any hidden liabilities and debts that the target may have?
What is the purpose of representations and warranties? What are the limits of such clauses?
What is the logical result of a successful hostile buy-up of shares on the market?
What market authorities’ concern is addressed by a suspension of trading after notice of an offer has been filed?
Why are defence mechanisms against hostile takeover bids very strictly regulated?
On the basis of financial theory, how can the role of an investment bank in a deal be summarised?
What is the fundamental difference between a merger and a sale:◦ for the shareholder of the acquired company?◦ for the acquiring company?◦ for the shareholder of the acquiring company?◦ for
Unlike what happens when a company is sold, when companies merge, their shareholders’equity is added together. Why?
In your view, what are the possible reasons behind a merger? And a demerger?
Ignoring tax issues, would a shareholder with a 51% controlling interest in a company be better off buying another company or merging with it?
Is the dilution of EPS that follows all mergers generally greater or less than that which follows a standard capital increase?
Why is the determination of the exchange parity important?
What is the difference between the relative value ratio and the exchange ratio?
When negotiating, is agreement first reached on the relative value or on the calculation method?
Why do shareholders in an acquired company agree to the dilution of their shareholdings after completion of the merger?
Where does the creation of value lie in a merger?
Why are the legal procedures related to mergers so onerous?
In what circumstances can a demerger lead to creation of shareholder value? And value for creditors?
Can the success of a merger be judged by comparing the market performance of the new entity with that of the reference index?
Can the success of a merger be judged by looking at the change in share price of the companies when the merger is announced?
Alpha AG is wholly owned by Mr Alpha and Beta AG is wholly owned by Mr Beta. The key figures for the two companies are as follows:Alpha acquires Beta. Calculate the shareholdings (as a percentage) of
Below are the key figures for Gamma plc and Delta plc:(a) Gamma acquires Delta. The criterion selected for calculation purposes is equity value. Calculate the old and new EPS, equity per share, and
Explain why an LBO is a type of capital reduction.
What risks are involved in an LBO?
Can mezzanine financing in the context of an LBO be compared with equity or debt?
In the context of an LBO, does the holder of senior debt take more or less risk than the holder of junior debt?
Can an LBO be carried out on a startup company?
In a secondary LBO, can an LBO fund accept that the management team does not reinvest part of the capital gains achieved on the first LBO in the new LBO? Why?
What are the different possible exit routes after an LBO?
How does corporate governance of an LBO differ from that of a listed company with no major shareholder?
How does corporate governance of an LBO differ from that of most unlisted family companies?
Why do companies go bankrupt?
What risks do you take if you buy a subsidiary of a group that you know is in financial distress?
Do the same types of conflict arise in the event of the bankruptcy of a partnership and that of a limited company? Why?
How in some countries can bankruptcy play a role in the survival of the company?
How do bankruptcy costs impact on the tax breaks available on debt?
Why are companies that are emerging from bankruptcy proceedings often strong competitors?
Why are companies in France that are emerging from bankruptcy proceedings rarely strong competitors?
Can a company with no debts go bankrupt? Can it destroy value?
Why is a company able to get back on its feet financially during the bankruptcy period?
Why do creditors agree to grant loans to companies during the bankruptcy period?
What are the pros of a creditor-friendly bankruptcy procedure for shareholders?
Name countries which have creditor-friendly bankruptcy procedures.
What are the three key objectives of a corporate treasurer?
What are the three cash positions for a company?
What is a value date?
What is a concentration account?
What is the main difference between national group pooling and international group pooling?
Does perfect daily balancing of accounts cost more or less than perfect notional pooling?
Is the risk of bankruptcy of a subsidiary an obstacle to cash pooling for a group which balances its accounts daily?
What is the main argument against full cash pooling for a group?
What sort of cash organisation is generally in place for highly decentralised groups?
What common practice is the principal of value dates based on?
Is an investment that can be quickly sold on a vast market without risk?
Can an investment yield more than a debt? What is then the consequence?
Why do treasurers avoid investing their cash in shares?
In 2006, ABN Amro created a new financial product, the Constant Proportion Debt Obligation, rated AAA by Standard & Poor’s and yielding 1% to 2% more than a AAA rated bond. What do you think?
What are the five financial risks that companies are exposed to?
Describe four ways for a company to deal with risk.
Use arbitrage to calculate forward selling of yens against euros at 3 months. What information do you need to do the calculation?
What is an FRA?
A Portuguese company imports maize from Mexico, which it in turn exports to Canada.The company pays and is paid at 3 months (the maize is in fact shipped direct from Mexico to Canada). Should it buy
What is a future?
What are the differences between OTC forward transactions and futures?
What role does a clearing house play?
Can credit derivatives be based on options?
Does a derivative product have to be sufficiently liquid to be attractive?
Can you provide examples of hedging products used by ordinary people?
What category of derivative products would personal injury insurance fit into?
Should corporate treasurers take advantage of any arbitrages that they detect on the markets?
Should traders take advantage of any arbitrages that they detect on the markets?
Excluding any costs, can a company hedge against all of its risks, taking the risk of opportunity into account? And the trader?
Calculate the future buy and sell price, at 3 months (dollar against euro) using the following information:◦ the 3-month euro rate is equal to 4 6/8 − 4 7/8%;◦ the 3-month dollar rate is equal
Calculate the 6-month interest rate of the dollar on the basis of the following information:◦ the 6-month euro rate is equal to 4 4/8 − 4 5/8%;◦ the euro is currently trading at $1.0210/20;◦
A market trader is offering a $500m loan agreement in 3 months, for a period of 3 months on the following terms: 3 3/4% − 3 7/8%. Using the information provided in Questions 1 and 2, can you
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