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business
introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

If there was an optimal debt-to-equity ratio, should it be stable over time? Why?AppendixLO1
An LBO fund is prepared to pay 3,000 for operating assets if the financing is split equally between debt and equity, and 3,500 if the split is 75% debt and 25% equity. State your views.AppendixLO1
70% of Company A's needs are equity-financed at a cost of 10% and 30% debt-financed at 6%. What is the weighted average cost of capital of this company if the tax rate is 20%, 50% and 80%?AppendixLO1
A company is totally financed by equity capital for a market value of 200m. The only tax it has to pay is corporate income tax at a rate of 30%. Calculate the value of this company if it borrows 50m
Company C is financed by equity with a market value of 40 and by debt with a market value of 30. This debt is perpetual and its interest rate is 6%. The corporate income tax rate is 30%.How much of
Redo the table on page 611 for Côte d'Ivoire and the USA assuming two situations: no debt and 500 of debt at 7%. Assume the investor and the firm are taxed in the highest bracket of the tax
When making a comparison with options, what does shareholders'equity correspond to?AppendixLO1
When making a comparison with options, what does a credit risk correspond to?AppendixLO1
For what type of company can we apply the options theory for the valuation of shareholders' equity?AppendixLO1
According to this theory, can the value of a company's equity be nil?AppendixLO1
Why is the application of this theory more efficient for companies in difficulty?AppendixLO1
Is this view of the company opposed to the theory of markets in equilibrium?AppendixLO1
Give an example of a decision where creditors are “expropriated” by shareholders, without the debt agreement being renegotiated. Explain.AppendixLO1
Is the effect of expropriation a result of market inefficiency?AppendixLO1
A company is in trouble as a result of low profits and excessive debts.Do you think that the creditors and the shareholders have the same concerns? More specifically, in the event of the
Can you give an example of a kind of company where shareholders'equity is made up of pure time value?AppendixLO1
If lenders are seeking to hedge their loan, should the impact be positive or negative on the share price of the borrower?AppendixLO1
The investment firm Verfinance owns 5,000 shares in Uninet, a group involved in the maintenance products sector, worth 10m. This asset is financed by a five-year zero-coupon bond (issued today) whose
Companies A and B each have to pay 100 to their creditors in one year. The risk-free rate is 5% per year. Below are the key figures for companies A and B, before and after a capital increase of 50
Take the figures for Holding plc (Section 34.3) and assume that the shareholders in the company decide to pay out a cash dividend of£13,380 totally financed by the sale of 63 shares in Daughter
Can a good financing plan make up for a mediocre investment?AppendixLO1
What disorder afflicts the investor who mistakes the coupon rate on a convertible bond for its financial cost?AppendixLO1
A 17% rate of return is required on a certain asset. The acquisition of that asset is financed entirely by equity. What rate of return do shareholders require on it? If the asset were financed
What is the source of financing for which the difference between financial cost and apparent cost is greatest?AppendixLO1
Would you advise a start-up to seek debt financing? If yes, could it get it?AppendixLO1
Is there an optimal capital structure?AppendixLO1
Equity capital has two roles in a financing plan. What are they?AppendixLO1
In the final analysis, isn't the cheapest financial resource short-term borrowing?AppendixLO1
How do you reconcile these two statements:“You can't make money without borrowing money.”“Borrowing can't create value.”AppendixLO1
Will a company with ample growth opportunities tend to issue short-term, mediumterm or long-term debt? Why?AppendixLO1
Give two examples of inflation profits. Under what conditions can they occur?AppendixLO1
If you believe a finance director's main concern is financial flexibility, would you expect a company ever to use up its borrowing capacity?AppendixLO1
Is a company destined always to be financed with equity capital?AppendixLO1
Can an entrepreneur with an industrial strategy be opportunistic in their financing choices over time?AppendixLO1
Why did European companies rid themselves of so much debt in 1980–1998? Why did they stop doing it in 1998–2002?AppendixLO1
A hotel group is able to finance itself more easily through debt than a high-tech company. Why?AppendixLO1
A mineral water company is able to finance itself through debt more easily than a pharmaceutical group. Why?AppendixLO1
Can an airline company finance itself through debt despite its heavy fixed costs?Why?AppendixLO1
Why is it that despite real interest rates being zero or close to zero since 2015, European companies are not taking on more debt?AppendixLO1
A company is considering the following:Year 0 1 2 3 4 5 Cash flow −100 −10 0 0 10 150 which can be financed with equity:Year 0 1 2 3 4 5 Debt/equity 30% 22% 22% 22% 22% 22%EPS 10 8.25 9.1 10.3
Why does internal financing enjoy such a positive image?AppendixLO1
Why is a policy of sticking strictly to internal financing unsound?AppendixLO1
What determines the rate of growth of capital employed?AppendixLO1
What should a company do if its rate of return on reinvested earnings is below the weighted average cost of capital?AppendixLO1
What is the market's sanction for over-reliance on internal financing?AppendixLO1
In your opinion, which theory best explains the interest of internal financing from an overall standpoint?AppendixLO1
Show with an example why reinvestment of earnings by the company has no cost for a holder of call options on the company's shares.AppendixLO1
By what criterion should a policy of reinvesting cash flow be judged?AppendixLO1
What kind of companies rely heavily on internal financing? What kind do not?AppendixLO1
Can internal financing lower the cost of capital?AppendixLO1
What are the advantages and drawbacks of 100% internal financing for family shareholders?AppendixLO1
Why is internal financing the financial resource with the lowest implementation cost?AppendixLO1
Under what condition can the dividend growth rate be superior to the growth rate of free cash flow?AppendixLO1
On the day of the dividend payment, the value of the share drops by the amount of the dividend. Has the shareholder become poorer?AppendixLO1
Under what condition can you accept that a firm does not pay a dividend?AppendixLO1
A firm that used to pay no dividends announces its first dividend payment. How would you interpret this according to efficient market theory, signalling theory, agency theory?AppendixLO1
Do you think tobacco companies have high or low payout ratios? Why?AppendixLO1
What does this story illustrate? Thanks to the profits made on the distribution of knitting yarns and wools under the Phildar brand, which were very large at the time, the Mulliez family was able to
An entrepreneur is determined to retain control of his company and refuses to accept any outside investors. The company's return on capital employed is 7.5% after tax. He wishes to achieve growth of
Choose an example of “death spiral” deterioration of capital structure, with an initial positive leverage effect that becomes negative. Construct tables like those presented in this
What are the two criteria by which a dividend policy should be judged?AppendixLO1
Does an increase in the dividend result in an increase in the value of the share?AppendixLO1
Given tax neutrality, would you prefer to receive dividends or realise capital gains?AppendixLO1
Does a manager who holds stock options in the company prefer buy-backs or dividends? Why?AppendixLO1
Is there a cost to the company of issuing bonus shares? Does such an issue change shareholder wealth? What purpose does it serve?AppendixLO1
Does a high dividend provide assurance of a stable share price? Why?AppendixLO1
Can a company have a target dividend yield for its shareholders? Why or why not?AppendixLO1
What is the natural temptation of a company that is required by its shareholders to pay out 100% of its earnings, in terms of how much earnings it records?AppendixLO1
Is a manager who holds stock options in favour of a high-dividend policy? Why or why not?AppendixLO1
What signal is sent by paying a dividend in shares?AppendixLO1
Explain why a sharp increase in dividend often results in a decrease in the value of the company's borrowings.AppendixLO1
What is the impact of a debt-heavy capital structure on the payout ratio?AppendixLO1
In what circumstances does a company have a good reason to undertake a capital decrease?AppendixLO1
Forgetting tax considerations, can a capital decrease enhance the value of the company's operating assets? The value of its shares?AppendixLO1
What difference do you see between payment of dividends and capital reduction?AppendixLO1
What is the necessary condition for a share buy-back to increase earnings per share?To increase the book value of equity capital per share?AppendixLO1
What does a share buy-back programme mean for the company's creditors?AppendixLO1
Under what conditions might a fast-growing company with opportunities to invest at a rate of return higher than its cost of capital undertake a capital decrease?AppendixLO1
On 21 May 2021, you observe the following data on Yahoo! Finance:Publicis share price: €55 Net dividend per share: €2.15 Earnings per share: €4.46 Calculate Publicis's payout ratio and the
What do you think of the dividend policies of the following companies?2014 2015 2016 2017 2018 2019 2020(A) EPS 100 115 131 150 160 165 167 DPS 20 23 26 30 35 41 60(B) EPS 350 402 458 524 559 577 584
Gassoumi plc has the following characteristics:Net earnings: £100m Number of shares: 1,000,000 Market price per share: £1,000 Book value of equity: £1,200m EPS: £100 Book value per share: £1,200
Rowak plc is a Syldavian industrial company listed on the Klow stock exchange. The number of shares in issue has been constant over the period at one million. The corporate income tax rate is
Is the issue price of the new shares important in a capital increase where each shareholder subscribes their share of the capital increase?AppendixLO1
What is dilution of control?AppendixLO1
When are there three different measures of dilution of control? What are they?AppendixLO1
What is the purpose of subscription rights? What is their theoretical value?AppendixLO1
At what price is a capital increase effected when made with an issue of subscription rights? When made without?AppendixLO1
How can a company be sold by means of a capital increase?AppendixLO1
What is the consequence of a capital increase on EPS in the short term? In the long term?AppendixLO1
Should there be an issue of new shares whenever the share price is overvalued?AppendixLO1
Why are the most profitable companies the ones that gain the most by issuing new shares?AppendixLO1
Does a capital increase with pre-emptive subscription rights signal overvaluation of the shares more strongly than one without?AppendixLO1
What can happen if rights trade significantly below their theoretical price? What is the limit?AppendixLO1
Why are share issues a complex decision to take for family-owned companies?AppendixLO1
What is most important in a capital increase?AppendixLO1
In the presence of subscription rights, what is the most relevant dilution of control?AppendixLO1
A company has a market value of €100m divided into 1 million shares. It proposes to raise funds equivalent to 25% of its value by issuing new shares at €75. Calculate the value of the
Case study: Carbios share issue in May 2021.Issue of 3m new shares without pre-emptive subscription rights:Number of shares before the capital increase: 8.164m Issue price: €38 Latest price: €41
Other case studies of share issues are available on the Vernimmen.com website, including Rubis, Neovacs, Générale de Santé.AppendixLO1
What is the point of backing a loan with an asset?AppendixLO1

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