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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

It has been said that a solid financial structure is a guarantee of freedom and independence for a company. Is this true?
Why is it difficult to determine the exact value of net assets in consolidated financial statements?
Why is the concept of net book value useful?
Nick Leeson bought futures betting on the Nikkei 225 index on the Osaka stock exchange, which he sold simultaneously on the Singapore stock exchange. He lost a billion euros, plunging Barings Bank
What is the economic function of speculation?
Can you explain why an “excessive” financial manager and a narrow-minded businessman will be unable to understand each other?
How can the ordinary saver reduce the risk she faces?
What conditions are necessary for arbitrage to work?
What is the economic function of arbitrage?
Can a market in which speculators are the only traders last indefinitely?
Would you be speculating if you bought so-called risk-free government bonds? What type of risk is not present in “risk-free” bonds?
Is it true that investors who lost money on Internet shares in early 2000 would not have lost anything if they had held onto their shares instead? State your views.
What is a speculative market?
What sort of regulatory mechanisms are in place to prevent speculative bubbles on:◦ derivatives markets;◦ secondary markets for debt securities;◦ equity markets.
Throughout the world, financial intermediaries can be split into two groups:◦ brokers: they connect buyers with sellers. Trades can only be completed if the brokers find a buyer for each seller,
Yes or no? Provided that investors' demands are met, companies have access to unlimited funds The announcement of anticipated losses has an impact on the share price Manipulating accounting
Which of the following statements in your view describe the inefficiency of a market?Which test demonstrates this?(a) Tax-free US municipal bonds with a lower rate of return for the investor than
What is the purpose of behavioural finance?
If financial markets are only occasionally efficient, is this of greater concern to small or large companies? Why?
What is discounting?
Why should we discount?
What is the discount factor equal to?
On what should you base a choice between two equal discounted values?
What is the simple link between the discount factor and the capitalisation factor?
Why are capitalisation factors always greater than 1?
Why are discount factors always less than 1?
Should you discount even if there is no inflation and no risk? Why?
Why does the graph on capitalisation show curves and not lines?
Belgacom pays out big dividends. Should its share price rise faster or slower than the share price of Ryanair which doesn’t pay out any dividends? Why? Would it be better to have Belgacom stock
What is net present value equal to?
The higher the rates of return, the larger present values will be. True or false?
What mechanism pushes market value towards present value?
Can net present value be negative? What does this mean?
What does the discount rate correspond to in formulas for calculating present value and net present value?
Are initial flows on an investment more often positive or negative? What about for final cash flows?
A market is in equilibrium when present values are nil and net present values are positive. True or false?
For the investment in Section 16.2, what is the maximum discount rate above which it would not be worthwhile for the investor?
Can the growth rate to infinity of a cash flow be higher than the discount rate? Why?
Could an investment made at a negative net present value result in the creation of value?
Would you be more likely to find investments with positive present value on financial markets or on industrial markets? Why?
What is the present value of €100 received in 3 years at 5%, 10% and 20%?
What is the present value at 10% of €100 received in 3 years, 5 years and 10 years?What are the discount factors?
How much would €1000 be worth in 5 years, invested at 5%, 10% and 20%. Why is the sum invested at 20% not double that invested at 10%?
How much would €1000 be worth in 5 years, 10 years and 20 years if invested at 8%?Why is the sum invested for 20 years not double that invested for 10 years?
You are keen to obtain a helicopter pilot’s licence. A club offers you lessons over two years, with a choice between the following payment terms:◦ you can either pay the full fees (€10,000)
What interest rate would turn 110 into 121 in 1 year?
How much would you have to invest today to have 100 in 8 years if the interest rate was 5%? What is the capitalisation factor?
At 7%, would you rather have BC100 today or €131.1 in 4 years’ time? Why?
Show that in order to double your money in one year, the interest rate would have to be around 75%/year.
Show that in order to treble your money in N years, the interest rate would have to be around 125%/N.
You are only prepared to forgo immediate spending if you get a 9% return on your investment. What would be the top price you would be prepared to pay for a security today that would pay you 121 in 2
If instead of throwing his 30 pieces of silver away in 33 AD, Judas had invested them at 3% per annum, how much would his descendants get in 2009? Explain your views.
You have the choice between buying a Francis Bacon painting for €100,000 which will be worth BC125,000 in 4 years, and investing in government bonds at 6%. What would your choice be? Why?
Given the level of risk, you require an 18% return on shares in Amazon.com. No dividends will be paid out for 5 years. What is the lowest price you could sell them at in 4 years’ time, if you
Ten years from now, at what price should you sell shares in Belgacom, which pays a constant annual dividend to infinity of €2.4, in order to get a 7% return? The share price today is BC25.9.
Assume that a share in Zaleski has a market value of 897, with the following cash flow schedule:Calculate the NPV of the share at 5%, 10%, 20% and 25%. Plot your answers on a graph. Year 1 2 3 4 5
What is the present value at 10% of a perpetual income of 100? And a perpetual income of 100 rising by 3% every year from the following year?
What is the present value at 10% of €100 paid annually for 3 years? Same question for a perpetual income.
An investment promises 4 annual payments of €52 over the next 4 years. You require an 8% return. How much would you be prepared to pay for this asset? The share is currently trading at €165.
Show that at 8% there is little difference between the value of a perpetual income and that of a security that offers a constant annual income equal to that of the perpetual income for only 40 years.
You have the opportunity to buy the right to park in a given parking place for 75 years, at a price of €300,000. You could also rent a parking place for €2000 a year, revised upwards by 2% every
You are the proud owner of the TV screening rights of the film Singing in the Rain.You sell the rights to screen the film on TV once every 2 years, for €0.8m. What is the value of your asset? The
You have found your dream house and you have the choice between renting it with a lease in perpetuity for €12,000 or buying it. At what purchase price would you be better off renting, if the loan
Your current after-tax annual income is €50,000, which should increase by 4% per year until you retire. You believe that if you interrupt your professional career for 2 years to do an MBA, you
Why can’t the internal rate of return be used for choosing between two investments?
Does the interest rate depend on the terms of repayment of a loan or an investment?
Does the interest rate depend on when cash flows occur ?
What are proportional rates?
What is internal rate of return?
What are proportional rates used for? And internal rate of return?
On the same loan, is the total amount of interest payable more if the loan is repaid in fixed annual instalments, by constant amortisation or on maturity?
If you believe that interest rates are going to rise, would you be better off choosing loans that are repayable on maturity or in fixed annual instalments?
If the purchase price of an investment is positive and all subsequent cash flows are positive, show how there can only be a single yield to maturity.
Is it better to make a small percentage on a very large amount or a large percentage on a small amount? Does this bring to mind one of the rules explained in this chapter?
A very high yield to maturity over a very short period is preferable to a yield to maturity that is 2% higher than the required rate of return over 10 years. True or false?
What interest rate on an investment would turn 120 into 172.8 over two years? What EXERCISES is the yield to maturity? What is the proportional rate over three months?
What is the terminal value on an initial investment of 100, if the investor is seeking a 14% yield to maturity after 7 years?
For how many years will 100 have to be invested to get 174.9 and a yield to maturity of 15%?
You invest €1000 today at 6% with interest paid on a half-yearly basis for 4 years.What is the yield to maturity of this investment? How much will you have at the end of the 4-year period?
Investment A can be bought for 4 and will earn 1 per year over 6 years. What is the yield to maturity? Investment B costs 6 and earns 2 over 2 years, then 1.5 over 3 years.What is the yield to
A company treasurer invests 100 for 18 months. The first bank he approaches offers to reinvest the funds at 0.8% per quarter, and the second bank, at 1.6% per half-year.Without actually doing the
A company treasurer invests €10,000,000 on the monetary market for 24 days. He gets back €10,019,745. What is the rate of return over 24 days? What is the yield to maturity?
Draw up a repayment schedule for a loan of 100, with a yield to maturity of 7% over 4 years, showing repayment in fixed annual instalments and constant amortisation.
Draw up a repayment schedule for a loan of 400, with a yield to maturity of 6.5% over 7 years with repayment deferred for 2 years, showing repayment in fixed annual instalments and constant
A bond issued at 98% of the nominal value is repaid at maturity at 108% after 10 years.Annual interest paid to subscribers is 7% of the nominal value. What is the yield to maturity of this bond? And
What is the discounted cost for the issuer of the bond described in question 10 if we factor in a 0.35% placement commission, and annual management fee of 2.5% of the coupon, a closing fee of 0.6% of
You sell your flat valued at €300,000 for a down payment of €100,000 and 20 monthly payments of €11,000. What is the monthly interest rate for this transaction? What is the yield to maturity?
Calculate the yield to maturity of the following Investment, which can be purchased today for 1,000: Year 1 2 3 4 5 Cash flow 232 2088 232 -232 -927
When making an investment decision, should you reason:◦ in terms of cash flow?◦ marginally?◦ without regard to the type of financing?◦ with consideration for taxation?
Define the payback ratio.
What are the drawbacks of the payback ratio?
Define return on capital employed.
Can an investment decision be based on return on capital employed?
What purpose does the return on capital employed serve?
What roles do depreciation and amortisation play in the calculation of cash flows to be discounted?
What is the optimal depreciation method for a company that is not taxed? What about for a company that pays tax at the standard rate?
A company is planning to build a new plant to replace an older one that is to be demolished. What are the most important flows to consider?(a) market value of the land and the older plant;(b)
When can investment in working capital be neglected?
Provide examples of investments where residual value must under no circumstances be neglected.
In Germany, profits for 2000 were taxed at 40% if they were paid out and 30% if reinvested. What rate should be used when making an investment decision?

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