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introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

A company currently sells goods on credit but offers no cash discount. The company is contemplating on offering a discount of 2 percent for payment prior to 15 days. The current ACP is 60 days; sales
A firm currently sells 10,000 all-terrain bicycles each at a price of Rs 4,000 each. The variable cost per cycle is Rs 3,520.The firm makes all sales on credit and average collection period is 36
Write a two-page essay on ‘Assessment of Credit Risk’.
What factors affect the choice of credit policy variables like cash discount, credit period, and credit standards?
What does the aging schedule not tell you?
Explain the following terms: average credit period, aging schedule, cash discount, and bad debt loss.
What financial ratios would help the most in assessing creditworthiness?
Refer to the data in the comprehensive illustration. What should be the level of sales to justify a switch to the new credit policy? At what cost of capital can the company switch to the new policy?
Explain the terms:2/10 Net 30 1/10 Net 45 Net 30
11. How do tax-haven domiciled subsidiaries of multinationals exploit the tax-deferral of foreign source income to minimize worldwide taxes?
10. How can multinationals exploit their global financial systems to create value?
9. What are the organizational challenges of managing the finance function in a multinational corporation? Where should the locus of financial decision making be housed?
8. Explain the international control conundrum faced by multinational corporations.
7. What are the unique risks faced by multinationals?
6. What is corporate governance, and how does it vary across countries?
5. Is international financial management different from domestic corporate finance?
4. What are the key motivations for firms to expand abroad?
3. What is meant by “the world is flat”? (Was Galileo wrong?)
2. Discuss the key drivers of globalization.
1. Define in your own words what is meant by globalization.
■ How multinational corporations can uniquely leverage their financial systems to minimize taxes and lower their cost of capital.
■ What the international control conundrum is about.
■ How the locus of decision making in the finance functionmigrates as firmsmorph from strictly domestic entities to fully developed multinational corporations.
■ How the exchange rate variable uniquely complicates financial decision making.
■ What makes international corporate finance uniquely different from domestic corporate finance.
■ What globalization is and how the multinational corporation is its handmaiden.
A company had sales of Rs 40,000 in February, and Rs 60,000 in March. Forecast sales for April, May and June are Rs 70,000, 100,000 and 90,000 respectively. The current cash balance as on April 1, is
A company collects, on an average, Rs 80 lac every day. The company is contemplating on instituting a lock box system.The new system could reduce its overall collection time by 3½ days. The system
Explain the salient features of a lockbox system.
How is a cash forecast different from a cash budget?
Explain the terms: deposit float, disbursement float, riding the float, and cash flow timeline.
How would you quantify the benefits of operating a lock box system?
A company receives cheques worth Rs 8 lac every day, and it issues cheques for Rs 2 lac. If cheque realization periods are 8 days and 5 days respectively, what will be the cash balance after 15 days?
Prepare a cash forecast. The sales forecasts for Jan, Feb and March are as shown:Jan: Rs 26 crore Feb: Rs 28 crore March: Rs 24 crore April: Rs 30 crore The company has historically experienced the
A company stores 3 weeks of raw material (Rs 10 lac), 2 weeks of work in process (Rs 15 lac), and 4 weeks of finished goods (Rs 20 lac). The company has outstanding credits of Rs 25 lac. Expense for
The current assets and current liabilities of a company are Rs 30 crore and Rs 18 crore respectively. Calculate the maximum permissible bank finance under the three methods, assuming that the core
What are the limitations of the cash budget approach to working capital lending?
Describe the four methods used by banks for working capital lending.
What are the drawbacks of the cash credit—overdraft system?
Discuss the salient features of the Chore Committee recommendations.
Calculate the operating cycle.Raw materials 0.96 months Stock in progress 1.44 months Finished goods 5.27 months Stores and spares 3.63 months Receivables 4.66 months
Refer to the data given below and calculate MPBF.A. Inventory: (Rs lac)Raw material 35.00 WIP 90.00 Finished goods 285.00 Stores & spares 61.00 B. Book debts 300.00 C. Other current assets 90.68 D.
A company is in the process of acquiring another company.5 The forecast of free cash flows are prepared on the basis of the following assumptions:• Current sales are Rs 5 crore.• Expected growth
Can equity be treated as an option held by shareholders? Why? Likewise, can debt be treated as an option held by creditors?Why or how?
A company has a project that requires an outlay of Rs 100 crore. The present value of cash flows from the project is Rs 110 crore. The company has the option to sell the stake in the project to the
A company is investing in a project. The project requires an outlay of Rs 100 crore, and the present value of cash flows is Rs 120 crore. This project is expected to lead to a second-generation
For two mutually exclusive investments, the management of the company has developed cash flow estimates as pessimistic, most likely, and optimistic.A B Investment 5,500 5,500 Pessimistic 200 700 Most
Find the accounting break-even point for a project that has the following characteristics:Fixed cost = Rs 50 crore Sales revenue/unit = Rs 1,000 Variable cost/unit = Rs 800
Find the financial break-even point for the example given above.
The following data is available for a project:Initial investment = Rs 10 crore (incl. working capital of Rs 2.5 crore)Expected life = 8 years Salvage value = 50 percent of initial investment First
(a) In the BHEL case, if the project cash flows falls by 5 percent what would be the NPV and IRR? What would be the percentage change in NPV?(b) If the initial investment is equally spread over 2
In trying to decide whether to approve a development budget for an improved product, you are urged to do so on the grounds that the development, if successful, will give you a competitive edge. But
The ACME company is in the oil business. It has a transferable short-term option to drill on a certain plot of land. The company has three options.(a) Drill immediately.(b) Pay to have a seismic test
A project has the following cash flows:Year Cash flow 0 (100,000)1 80,000 2 100,000 3 (200,000)4 120,000 Find the IRR. Would you accept the project at a hurdle rate of 16.5 percent?
You are evaluating two alternative machines for your machine shop. They have the following characteristics.Machine Cost Operating cost per year Expected life A 800,000 40,000 8 years B 1,000,000
A company has the following investments:(Rs million)Project Investment NPV A 2.50 1.75 B 1.0 0.8 C 1.5 1.5 D 2.0 2.0 E 2.0 2.4 If the company has a capital constraint of Rs 50 lac, which set of
The rates of The Indian Management Journal are as follows:1 year – Rs 215 2 years – Rs 395 3 years – Rs 540 Assuming that subscription rates do not change, which offer would you choose? Assume
The cash flows from two investments are:Years Investment 0 1 2 3 A 100,000 70,000 70,000 B 120,000 60,000 60,000 60,000 Which of them would you choose if the cost of capital is 17 percent?
A growth company has Rs 4 crore to invest in any or all of the following projects:(in Rs ’000)Type of Years Project cash flow 0 1 2 3 i. Investment (10,000)Revenue 21,000 Operating 11,000 expenses
Calculate IRR for the two mutually exclusive projects given here:Project A Project B Year Cash flow Cash flow 0 500,000 1,500,000 1–4 100,000 200,000 5–10 150,000 250,000 If the cost of capital
You are evaluating a project that has the following characteristics:Initial investment = Rs 2 million.Cash flows are expected to remain constant for 5 years, double in the sixth year and remain at
The Primitive Car Company is evaluating a project which requires an initial investment of Rs 20 lac. The project cash flows are given here:Year Cash flow 1 100,000 2–5 200,000 6–10 400,000
Calculate the discounted payback for question (2) if the discount rate is 13 percent.
A project requires an initial investment of Rs 1,000,000. The first year cash flow is expected to be Rs 100,000. It is expected to grow at 20 percent per annum for five years and remain at year 6
Calculate the payback period for each of the investments. If the maximum acceptable payback period is 3 years, which of the investments would be accepted?Years Investment 0 1 2 3 4 A (1,000) 500 300
The initial investment and NOPAT for three projects is given here:Years Investment Outlay 1 2 3 4 A 10,000 2,000 3,000 4,000 4,000 B 7,500 1,500 2,000 2,500 5,000 C 5,000 2,000 1,500 1,000 500
A fuel injection company has four investments:a. A project to implement ERP software in the company.b. A proposal to start a software subsidiaryc. Repairing an old assembly line.d. A proposal to
A Caselet: Nirmal Chemical Company The Nirmal Chemical Company is planning to invest in a new plant. The team of analysts responsible for investment appraisal has arrived at the following
Academic studies suggest the take over candidates are often firms with low leverage and poor operating performance. Are any of these firms good takeover candidates? Why?
What were the factors that caused the change in return on equity for each company? Perform a DuPont Analysis.
Look at the financial ratios for these firms. Which firm has the most (least) liquidity as of 2001? Can a firm have too much liquidity? Which firm is best (worst) at managing assets as of 2001? Which
See the cash flow statements. Why did cash flow from operations increase from Rs 53.79 crore to Rs 212.09 crore for Glaxo? Did all the firms experience an increase in cash flow from operations? If
See the common size income statements. Compare year 2000 to 2001. Which firm is the most profitable? Why does net income vary from 4 percent to 22 percent across firms?
See the common size balance sheets. Compare year 2000 to 2001. Why do current assets vary across firms? Why does borrowing vary from 1 percent to 35 percent across firms?
Evaluate each company in terms of growth in total assets, long-term debt, stockholders equity, sales, operating profit, pretax income, and net income for 2001.
Given below is a company’s quarterly balance sheet. Prepare the funds flow statement and comment on the movement of funds.Q4 Q3 Q2 Q1 A/C payable 159 126 42 98 Notes payable 115 89 39 154 Preferred
Calculate the return on assets for the two companies given here:Alpha Beta Net sales Rs 25,375,000 –Total assets – Rs 4,250,000 Net profit on sales 5 percent 20 percent Turnover of assets 6X
A company with a current ratio of 2.5 has current liabilities of $130,000. Indicate whether the transactions increase or decrease the current ratio, the working capital and if yes, to what extent.•
From the following data calculate the Collection Period, Payables Period, and Inventory Turnover respectively:A. Sales Rs 150,000 Accounts receivable Rs 12,000 B. Sales Rs 900,000 Cost of sales Rs
On January 2, 1991, Vivek Singh, a young MBA, set up a manufacturing unit. 500,000 shares were issued at par (Rs 10).During the period—January through June—the company made the following
Classify as sources and uses:Fixed assets –500 Long-term debt 2,000 Cash –300 Accounts payable 1,000 Net profit –600 Cash dividends 800 Public issue of shares 1,000
The balance sheets and income statements for Avon Granites (identity has been disguised) are given here:
The Electricity Regulatory Commission is in the process of estimating cost of equity for electric companies. The commission regulates the price per unit of electricity the electric company can charge
Sushill Shyam Sundar is the finance manager of a biotechnology company. His company shares characteristics of both companies: pharmaceutical and specialized chemicals. So obtaining a pure play proxy
Given the following book and market value data calculate WACC based on book value weights and market value weights.Assume suitable CAPM parameters.Book value Market value Long term debt (12 percent)
Using the data given below estimate cost of capital.Beta = 1.2, Rf = 12.15 percent, market premium = 10 percent. The company has stated that it intends to maintain a debt to value ratio of 0.40. The
You are in the process of coming out with a public issue. So you are interested in cost of equity. This is the first public issue. So there is no stock market history for your company. How would you
Estimate the industry beta for cement, steel, and pharmaceuticals.
Estimate the beta for the following portfolio. Use the data given in the chapter or other sources.Company Weightage Bajaj Auto 0.2 L&T 0.1 Grasim 0.1 TISCO 0.15 TELCO 0.05 RIL 0.15 Indian Rayon 0.10
Estimate cost of equity and cost of capital for HLL, TVS Suzuki, and Tata Chemicals.
Estimate BSE 30 returns (weekly and monthly) for the last two years. Convert them into annual returns.
Draw characteristic line for the same stocks. Interpret the line. Classify the stocks as aggressive, defensive and neutral.
Estimate ∝, β, standard error of ∝ and β, R2 for the following stocks. Establish 95 percent confidence interval for beta.Stocks Tata Chemicals HLL Cadbury’s Use monthly returns for the last 5
The following data is available for three stocks:Stock Variance Covariance (i, m) Correlation (i, m)1 114.4 52.58 0.84 2 72.50 42.50 0.85 3 283.73 28.0 0.30 If market variance = 34.30, which of the
Given here are stock and market returns. Calculate mean and standard deviation of returns, correlation and covariance.Year Stock return (percent) Market return (percent)1987 7.64 14.31 1988 16.98
Given here is the correlation matrix for three stocks:AB C A 1.0 0.37 0.49 B 0.37 1.0 0.66 C 0.49 0.66 1.0 Other information:E(R) 0.04 0.10 0.09 Variance 0.02 0.03 0.008 Standard deviation 0.14 0.17
Many stocks have yielded negative returns in the recent past (1994–98). Do you think it is correct to extrapolate them into the future? How would you alter your estimate?
What factors do you think will affect market returns?
Suppose in a country only 3–4 stocks (in the index) account for 75 percent of market capitalization. What would be its effect on beta estimate?
Suppose that the government defaults on sovereign borrowings. So T-Bond rate cannot be considered risk-free. How would you come up with a risk-free asset?

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