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introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

11. Denmark’s currency regime (intermediate). Visit http://fx.sauder.ubc.ca/data.html to sketch the exchange rate of the Danish krone against the euro over the period 1999–2018. How would you
10. Valuing SDRs (intermediate). Using the findings of the previous problem, visit the website of Yahoo! Finance at www.finance.yahoo.coma. Value in US dollar terms one SDR at today’s exchange
9. Special Drawing Rights (beginner). Visit the IMF website at www.imf.org and research the currency composition of the IMF’s artificial currency unit. Explain the logic behind the currency
8. A single currency for a global economy (advanced). The daily turnover in the foreign exchange market approaches $4 trillion or a yearly turnover of $1,000 trillion(with 252 working days in a given
7. Telmex dual listing and the Mexican peso devaluation (intermediate). Shares of Telefonos Mexicanos (Telmex) listed on the New York Stock Exchange fell from$60 to $48 when theMexican peso (MXN) was
6. Advance deposit schemes and effective exchange rates (intermediate). Over the years, a number of developing countries have maintained an advance deposit scheme for imports. Such systems typically
5. Daily forex rates fixing by the Central Bank of South Korea (advanced). The Central Bank of South Korea announces every business day at 9:00 A.M. a fixed rate at which it will buy or sell U.S.
4. The Hong Kong currency board in the shadow of the rising yuan (intermediate).Since 1983, the Hong Kong dollar (HK$) is via a currency board pegged to the U.S. dollar at the rate of HK$7.80 = US$1.
3. The Malaysian ringgit pegged to the U.S. dollar (intermediate). Malaysia pegs its currency, the Malaysian ringgit (MYR), to the U.S. dollar. The par value is MYR 4 = US$1.a. What is the par value
2. When the Bangladeshi taka depreciates (beginner). The central bank of Bangladesh is contemplating a devaluation of its currency – the taka (BDT) – from BDT 69 to BDT 100 = US$1:a. What would
1. When the Swiss franc appreciates (beginner). Over the past five years the Swiss franc (CHF) appreciated from CHF 1 = US$0.8215 to peak at CHF 1 =US$1.0697.a. Calculate the percentage appreciation
11. What is the difference between a system of multiple exchange rates and the imposition of different tariff rates on imports?
10. Why do many developing countries maintain controlled exchange rates at overvalued exchange rates?
9. What is the difference between controlled exchange rates and stabilized exchange rates?
8. The last time the U.S. Federal Reserve Bank intervened in the forex market was in 1995. Would you expect the U.S. foreign exchange reserves to have increased or decreased over the past 18 years?
7. What does the explosive growth in China’s reserves tell you about the nature of its exchange rate regime?
6. How would you contrast a controlled exchange rate with a stabilized exchange rate?
5. What is the difference between central bank intervention in the foreign exchange market in the context of floating versus stabilized exchange rates?
4. Explain how central bank intervention allows a country to keep its forex rate at a certain level.
3. What is the difference between currency convertibility and exchange rate flexibility?
2. Why do countries intervene in their foreign exchange markets?
1. What is the difference between a “clean” float and a “dirty” float?
■ What is The choice of an appropriate exchange rate regime between fixed exchange rates and floating exchange rates
■ What is The functioning of controlled exchange rates in emerging market economies
■ Artificial currency units (ACUs), also known as “basket of currencies,” and how they are used in international finance
■ How central banks intervene in the foreign exchange market
■ Why central banks intervene in the foreign (FX, forex) market and what policy objectives they pursue
■ How to calculate the percentage of currency appreciation or depreciation resulting from a given exchange rate change
■ How exchange rates are determined in a free market and the concept of an equilibrium exchange rate
A company is in the process of estimating EVA for two of its divisions: beverages and restaurants. The estimation of EVA requires an estimate of divisional cost of capital. The industry beta and
The following data is available for a company for the period 1985–89:(Rs ‘000)1985 1986 1987 1988 1989 NOPAT 235,029 270,140 281,950 296,642 362,744 Beginning capital 1,430,280 1,981,285
Corporate managers generally don’t disgorge cash unless they are forced to do so. In 1988, the 1,000 largest firms generated total funds of $1.6 trillion. Yet they distributed only $108 billion as
Compare and contrast the organizational structure of a typical corporation with that of a LBO association.
An LBO firm has tentatively agreed to pay Rs 1.1 billion to acquire a certain business. The managers of the business anticipate EBIT of Rs 100 million for the first year. EBIT is expected to grow at
An LBO fund has received an offer to sell from the founder of a company. The company manufactures paper that is not seasonal. In 2000, the company had a market share of 26 percent of the industry.
Assume that the cost of unlevered equity is 18 percent. What is the division’s worth? Use APV (adjusted present value).
A company is in the process of setting up a media division with projected cash flows as follows: The new operation require an initial investment in plant and equipment of Rs 100 crore, plus an
ABC Ltd. is considering the acquisition of XYZ Ltd. The management of ABC believes that cost of goods sold could be reduced by 1.5 percent over the next 3 years (due to purchasing economies) and
The executives of Babur Chemicals are evaluating a potential acquisition candidate: Arathi Chemicals. The forecast of free cash flow under the current management is as follows:Cash flows are expected
Write essays on the following topics:• Role of top management in acquisitions• Post merger integration• Non synergistic acquisitions• Post-acquisition performance appraisal.
The adjusted present value approach and the WACC approach should yield the same results. Can you think of a situation when they diverge?For the illustration (Clariant) given in the chapter, conduct a
Refer to the following data: Beta = 1.40, market premium = 10 percent, Long-term T-bond rate = 12 percent. Pre-tax cost of debt = 13.5 percent, Tax rate = 35 percent, Target debt-to-value ratio =
A company currently has a PAT of Rs 40 crore; depreciation is Rs 20 crore; capital expenditure is Rs 100 crore. If the PAT is expected to grow at 30 percent and capital expenditure at 10 percent,
The following data is available for a company:(Rs crore)Debt @ 15 percent 50 Equity 50 EBIT 28.30 Interest 75.0 Tax 8.30 PAT 12.50 The company has a project with an outlay of Rs 9 crore. The company
A company is currently earning 12 percent return on equity. The following stock market data is available. Rf = 12 percent, beta = 1.1 and risk premium = 10 percent. Would you force the company to pay
The income statement of a company is as follows:EBIT 2000 Interest 400 Tax 560 PAT 1040 No. of shares outstanding = 100 Dividends paid = 400 Current stock price = 12 Calculate dividend payout and
Some financial economists (like Higgins) do not accept that investors and managements who pay attention to dividends are irrational. Consequently they try to build regression models to explain
There are four companies in an industry group other than your company. Their payouts are: 30 percent, 28 percent, 45 percent and 35 percent. How would you compare your dividend policy with that of
What do you think would be the impact of dividend tax on cost of equity?
How would you choose between dividends and stock repurchases as a CFO? What considerations might affect your decision?
An airline company needs an aircraft. It has two options.• Buy the aircraft for Rs 50 crore at a post-tax cost of debt of 8.5 percent. The aircraft has a life of 15 years at the end of which it can
Lease payments are usually quoted as a fraction of Rs 1,000 of asset cost on a monthly basis. Convert lease rentals in question 1 to this format.
Can leasing become viable because of better credit rating of the lessor? How? Why; or, why not?
Some argue that leasing becomes viable because of lower cost of capital for the lessor because his primary source of finance is low cost fixed deposits. The lessor uses his cost of capital as
If the salvage value of the equipment in Question 1 is 10 percent, how would your answer change? The cost of capital is 17 percent.
The annual lease rental is Rs 1.5 lac per annum. The after-tax borrowing rate is 7 percent. The lease term is 8 years. Find the monthly lease rental.
Refer to the given data:Asset cost = Rs 220 lac Lease payments for the first 7 years = Rs 23 lac Lease payments for the next 8 years = Rs 28 lac Salvage value = 0 Lease payments are made at the end
Calculate the current debt–to–value ratio in terms of book value and market value. And suggest a suitable financing plan to the company.
Is the current debt policy justified? Are there gains from leverage for this company (CFA)?
Calculate relevant ratios and predict what rating the company might get. Extrapolate if necessary.
Prepare a forecast of balance sheet and income statement under the two financing plans with the available data. Make suitable assumptions if necessary.
The excess, if any, of the S&P 500 index value over the initial (exercise) value of the index times some determined multiplier.The exercise price of the call option and the multiplier were fixed at
The principal amount of $1,000 per bond and accrued interest plus
On September 1, 1986 Salomon Brothers issued Standard & Poor’s 500 indexed note (SPIN) to the public at par for a total of $100,000,000.18 The SPIN is a four-year 2 percent (payable 1 percent every
In 1991, the Republic of Austria offered $100 million principal amount of stock index growth notes (SIGNs) in the US.17 The SIGNs mature in 5.5 years and do not make any interest payments prior to
The value of a convertible is the sum of the values of the straight bond component and the conversion option (equity component). The value of the straight bond component can be calculated by
Calculate the conversion premium for the same bond if the conversion ratio is 12.5 and the current market price is Rs 75.
Calculate the conversion ratio if the bond can be converted to shares at Rs 20 per share.
Calculate the conversion price of a bond of Rs 1,000 face value convertible into 50 shares.
A company needs Rs 10 lac in new, long-term financing. The firm is considering the issue of shares or convertibles. The current market price of the stock is Rs 20.The new issue could be sold for Rs
In December 1988 American Express, Dow Chemical, Pfizer and Sara Lee announced plans to offer ‘Unbundled Stock Units’ (USUs). Shareholders of these companies could surrender their shares in
Explain the terms Managerial Entrenchment and Underinvestment.
You are analyzing the debt policy of Ashok Leyland. You have obtained debt ratios of other companies in the automobile industry group. You notice that debt ratios vary among companies. Is it correct
Calculate cost of equity at all the debt levels assuming suitable CAPM parameters.
Calculate levered betas at various debt levels:Beta — 0.8 — —D/E 0 0.5 0.6 0.7
Cost of unlevered equity = 18.6 percent, cost of debt = 12 percent, tax rate = 35 percent. The project will be financed with Rs 18,000 of debt and Rs 17,600 of levered equity. Calculate cost of
Unlevered beta = 1.4, risk free rate = 8 percent and risk premium is 10 percent. What is the unlevered cost of equity?
Is it possible to reduce the risk of insolvency by acquiring a project whose cash flows are less than perfectly correlated with that of the firm?
If the project is financed with debt and equity, what is the value of the project if the increase in debt capacity is Rs 18,000?
A project is expected to generate net operating income of Rs 10,000. The cost of unlevered equity is 18.6 percent and tax rate is 35 percent, what is the value of the project?
Borrowing enforces discipline on the company’s management. Explain.
Conventional lending gives recourse to the promoter in case of project failure. Can there be a type of debt where there is no recourse? How would your analysis change in case of such a project?
Assembling a pie cut into six pieces and buying a whole pie are not the same. Explain.
Borrowing can make an unviable project viable. Explain.
Suppose the government makes only half the interest expense tax deductible. What will be its impact on capital structure?
Marginal tax rate, variability of operating cash flows, creditors’ difficulty in monitoring a firm and need for flexibility are some of the factors that affect capital structure. What relationship
The Government of India introduced dividend tax in 1998. Dividends, henceforth, will be taxed at a flat rate of 10 percent at the corporate level.5 What could be its impact on capital structure and
Companies that derive much of their value from future growth opportunities should use relatively less debt.
Companies that generate lots of cash suffer from a free cash flow problem.
If the tax rate on debt and equity are the same and the company doesn’t pay taxes, then there is no advantage to debt.
There is as much money to be made on the left-hand side of the balance sheet as there is on the righthand side.
A hybrid financial instrument like a convertible bond that gives a bondholder an option to buy shares of the company is essentially designed to address the agency problem.
The cost of debt increases with debt ratio.
The cost of equity increases linearly with leverage.
Maximizing shareholders wealth is same as maximizing firm value.
Maximizing firm value is same as minimizing WACC.
The agency cost of debt is borne by the shareholders.
A company currently sells 72,000 units at Rs 32 each. Other data:Current bad debt expense = 3 percent Collection expenditure = Rs 20,000 ACP = 58 days Variable cost = Rs 25 The company is
A company is considering lengthening its credit period from 30 to 60 days. The firm currently sells 15,000 units at Rs 3 each. The ACP is 40 days; bad debts are ½ percent; variable cost is Rs 2.30.
A company is contemplating a change in its credit policy that is expected to increase its bad debt expense from 1 percent to 3 percent of sales. Current sales are 25,000 units; selling price per unit

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