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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

Price GE call options with exercise prices of 40 and 45, respectively, given a current stock price of $34.67, three months to maturity of the options. And a relevant risk-free rate of 4.80%. If the
The following are the possible rates of return before taxes and the a-priori probabilities on an investment project:a. If the tax rate is 35% and there is no offset for losses, what is the expected
A firm is considering making an acquisition. Given the following data, what should the firm offer as a purchase price, if the acquiring firm has a five-year-ahead cash flow valuation horizon?
The XYZ Corporation was bankrupt. It was decided to liquidate the firm. The following claims were presented:How much would each class of claimant get on the dollar?a. If the fixed assets were
Present the United States G.D.P. per annum from 1950 to date. (You may show this in a graph or in tabular form.) What is the average growth rate over this period?
Deflate the G.D.P .for price level changes and growth in population. What is the growth rate on this basis?
Choose an industrial firm or a utility that has not engaged in any significant mergers or acquisitions. Using total assets as a rough measure, compare the firm’s growth to that of the undeflated
Look up the balance sheet of Microsoft and DuPont in the investment manuals (Mergent’s Industrial Manual and/or Standard and Poor’s Stock Guide) and secure the company’s latest annual report.a.
Look up the income statement Lucent Technologies, Inc. in Mergent’s Industrial Manual or Standard and Poor’s Stock Guide, and secure the company’s latest annual report. Obtain or calculate the
Obtain the latest annual report for Microsoft (MSFT), and calculate the current ratio, acid test ratio, total debt-total assets ratio, sales-to-assets ratio, and return on equity ratios. Compare the
Management is interested in restructuring the firm. Mr. Dynamo, a recent MBA, argues that an efficient method to enhance the firm’s ROE and Altman Z-score is to sell-off the firm’s unprofitable
The controller of the Largay Corporation wished to estimate his cash needs for the coming six months. The controller, his salesmen, and production men constructed the following sales and purchase and
We have the following significant information about Firm A:Explain what has happened to the financial position of this firm. Very importantly, what changes were made in its “current” capital
The directors of the Thistlewaite Corporation need $5,000,000 to finance a new plant. The Prudence Insurance Company is willing to loan the company$3,000,000 on a privately placed long-term mortgage,
The Thistlewaite Corporation decides to float new commons tock to obtain the$2,000,000 – at $50 per share. How many shares do they need?
Their present capital position shows 500,000 shares authorized, 360,000 issued.The market price of the outstanding Thistlewaite shares is $76.a. Explain the use of the pre-emptive right in this
What risks do lenders run? How can lenders protect themselves against these risks?
What is the ultimate guarantee that the lenders will be repaid?
What is solvency?
Is an insolvent company necessarily required to declare itself bankrupt?
A company goes into debt with a one day maturity in order to buy fixed rate bonds.Is it running a liquidity risk? And a solvency risk? In what way does the risk manifest itself? What move in interest
Is a company with negative net assets illiquid? Insolvent?
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%?

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