Part A Project Evaluation - 3 questions (2 points each, total 6 points)

Consider the initial investment requirement and the subsequent net cash flows relating to the following two independent projects:

Timing Project A Project B Investment required today (cash outflow) $50,000 $60,000 Net cash inflow at end of year 1 $30,000 $32,000 Net cash inflow at end of year 2 $25,000 $26,000 Net cash inflow at end of year 3 $20,000 $24,000 Net cash inflow at end of year 4 $15,000 $18,000 Net cash inflow at end of year 5 $9,500 $5,000 The appropriate discount rate for both projects is 10% per annum.

1. Using the data supplied in the above table, what is the NPV of Project A (to the nearest thousand dollars e.g. If NPV = $40,267 then the answer would be $40,000)?

2. Using the data supplied in the above table, what is the NPV of Project B (to the nearest thousand dollars)?

3. Looking at only your NPV analysis (and hence not assuming any other constraints are faced by the firm), what is the appropriate investment decision? Briefly explain this decision

Part B Explaining Variation in Debt Levels - 1 question (4 points)

4. Critically evaluate this statement (maximum 250 words):

One of the main insights provided by the pecking order theory, as opposed to other theories of capital structure, is that it helps to explain why firms operating in different industries might have very different leverage levels.

Part C Mergers and Acquisitions - 2 questions (3 points each, total 6 points)

Consider the following:

In November 2008 the Belgian-Brazilian company InBev completed its $52 bn acquisition of US firm Anheuser-Busch.

5. Would you classify this deal as a horizontal, vertical or conglomerate acquisition? Briefly explain why (maximum 100 words).

6. What control premium did Anheuser-Busch shareholders receive from the deal?

Note: Use the closing Anheuser-Busch share price of $50.55 for 19 May 2008 as the pre-bid share price and record your answer in percentage terms to the nearest percentage point (e.g. 17.2% would be recorded as 17%).

Part D Risk Management - 2 questions (2 points each, total 4 points)

Critically evaluate the following statement (maximum 100 words):

7. The opposite financial outcome to buying the right to buy is buying the right to sell.

Critically evaluate the following statement (maximum 100 words):

8. Hedging with forward contracts enables a firm to always be better off financially at contract maturity than if it did not hedge.