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business
corporate finance principles and practice
Questions and Answers of
Corporate Finance Principles And Practice
Calculate the following values assuming a discount rate of
per cent:(a) £500 compounded for five years;(b) the present value of £500 to be received in five years’ time;(c) the present value of £500 received each year for ever;(d) the present value of
Which of the following statements about the efficient market hypothesis is not correct?(a) If the stock market shows weak form efficiency, chartists cannot make consistent abnormal returns.(b) If the
Describe the five categories of ratios, list and define the ratios in each category, and, without referring to the calculations in the text, calculate each ratio for Boater plc.
Is it worth offering discounts to debtors to encourage prompt payment?
Discuss briefly the key features of debentures and ordinary loan stock.
A company has in issue some 9 per cent debentures, which are redeemable at par in three years’ time. Investors now require a yield of 10 per cent. What will be the current ex-interest market value
Illustrate with a simple example the calculation of 25 per cent reducing balance capital allowances.
Explain the meaning of the term ‘Monte Carlo simulation’.
Five years ago, Eranio plc issued 12 per cent irredeemable debentures at their par value of £100. The current market price of these debentures is £94. If the company pays corporation tax at a rate
Pollock has in issue 1 million ordinary shares, par value 25p and £100 000 of 10 per cent irredeemable debentures. The current ex-dividend market price of the ordinary shares is 49p per share and
Which of the following companies is likely to have the highest equity beta?(a) A highly geared supermarket company(b) A low-geared electricity generating company(c) A highly geared building materials
For which of the following reasons might a company considered to be risky have a lower beta factor than an equivalent company that is perceived as less risky?(a) The risky company has a lower
A company incorporates increasing amounts of debt finance into its capital structure while leaving its operating risk unchanged. Assuming that a perfect capital market exists with no taxation, will
One-third of the total market value of Johnson plc consists of loan stock with a cost of 10 per cent. York plc is identical in every respect to Johnson except that its capital structure is all equity
Which of the following statements concerning capital structure is not correct?(a) Bankruptcy risk is ignored in Miller and Modigliani’s first model.(b) Debt holders are not subject to the effects
If a company finds that its cost of capital has changed, does this affect the company’s profitability?
What is the significance of the arbitrage proof for Miller and Modigliani’s first paper on capital structure?
Which of the following statements lends support to dividend irrelevance rather than to dividend relevance theory?(a) Investors prefer the certainty of dividends to the uncertainty of capital
Which of the following statements best sums up recent trends in corporate dividend payments?(a) Nominal dividends per share have remained constant or slightly increased.(b) Companies have made large
Discuss the use of the P/E ratio and dividend growth methods of determining the value of a target company.
Briefly discuss the advantages and disadvantages of financing a takeover by an issue of convertible debentures.
In the following cases, state which type of exchange rate risk the company is facing and whether this risk is beneficial or harmful in nature.(a) A power-generating company imports coal from Germany,
Recommend internal hedging methods that a company can use in order to reduce translation risk and transaction risk.
A company is expecting to have to pay $345 000 in three months’ time. It is afraid that over this period the pound will depreciate against the dollar. If the current exchange rate is $1.78/£ and
A company is going to borrow £6m in three months’ time for a period of six months.It is afraid that interest rates will rise between now and the time that the loan is taken out. It intends to
For what strategic reasons may a company decide to build a manufacturing facility in another country?
Briefly describe the economic reasons why a company might choose to undertake foreign direct investment.
Explain the advantages and disadvantages of exporting, licensing and foreign direct investment as different ways of conducting international trade.
Describe the advantages and disadvantages of joint venture as a way of selling goods to another country.
Discuss whether foreign direct investment should be evaluated at the local level or at the parent company level.
Explain how political risk may be assessed by a company considering foreign direct investment.
Describe briefly the policies and strategies that a company could use to mitigate the problem of political risk.
Calculate the following values assuming a discount rate of 12 per cent:(a) £500 compounded for five years;(b) the present value of £500 to be received in five years’ time;(c) the present value of
Sec uses 60 000 tons of salt over a 50-week working year. It costs £100 to order salt and delivery follows two weeks later. Storage costs for the salt are expected to be £0.10 per ton per year. The
Describe the main source of short-term finance for a company.
Cold plc has decided to acquire equipment with a current market value of £700 000.A bank has offered a five-year loan at an interest rate of 13 per cent per year, provided it can reach agreement
The finance director of Park plc is preparing financial plans and different departments have submitted a number of capital investment applications. The managing director has said that no more than
Brown Ltd is considering buying a new machine which would have a useful economic life of five years, a cost of £125 000 and a scrap value of £30 000, with 80 per cent of the cost being payable at
Mr Smart has c75 000 invested in relatively risk-free assets returning 10 per cent per year. He has been approached by a friend with a ‘really good idea’ for a business venture. This would take
Loring plc has paid the following dividends in recent years:The dividend for 2009 has just been paid. The risk-free rate of return is 6 per cent and the market rate of return is 15 per cent.(a) If
Carbon and Short plc both operate in the same industry with the same business risk.Their earnings, capital structure, share prices and other data are as follows:Kitson holds £1000 worth of shares in
LMT is a company that has been listed on the London Stock Exchange since 2004.Institutional investors own approximately 45 per cent of the ordinary shares of the company. The recent financial
In the following cases, state which type of exchange rate risk the company is facing and whether this risk is beneficial or harmful in nature.(a) A power-generating company imports coal from Germany,
Which of the following will not help a company to hedge successfully against an increase in interest rates?(a) Selling interest rate futures contracts;(b) Swapping floating rate interest for fixed
Given the following list of US sterling currency options (all with three months to run)and the fact that the current spot rate is $1.55/£, which option do you expect to have the highest market
Explain how political risk may be assessed by a company considering foreign direct investment and identify the policies and strategies that it could use to mitigate the risk.(S-8)
It has become increasingly common for companies to offer their shareholders a choice between a cash dividend and an equivalent scrip dividend of shares. Briefly consider the advantages of scrip
(a) Critically evaluate the extent to which the following factors affect a company’s dividend policy.■ The industry in which the company operates.■ The level of infl ation.■ The company’s
Ropeonfire is currently deciding on the level and form of its next dividend. It is considering three options:(i) a cash dividend payment of 20p per share;(ii) a 6 per cent scrip dividend;(iii) a
The ordinary shares of ZZZ are currently trading at 80p. The last dividend per share was 15p and its dividends have been constant for 10 years. The company plans to finance a new investment project
It is 31 January 2009 and the managers of Dilbert are considering a change in the company’s dividend policy. Earnings per share for 2008 for the company were 22.8 pence, and the finance director
Briefly outline the economic reasons used to justify acquisitions.
Briefly outline the financial reasons used to justify acquisitions.
Explain why the DCF valuation method is preferred by academics.
Briefly describe four defences that could be used by a company after its board has received a takeover bid.
Explain why a company may look to divest part of its operations.
Describe briefly some of the important contributing factors which explain why shareholders of acquiring companies rarely benefit from takeovers.
Restwell plc, a hotel and leisure company, is currently considering taking over a smaller private limited company, Staygood Ltd. The board of Restwell is in the process of making a bid for Staygood
Carsley plc and Powell plc are planning to merge to form Stimac plc. It has been agreed that Powell’s shareholders will accept three shares in Carsley for every share in Powell they hold. Other
It is currently 1 January 2010 and Lissom plc is looking to divest itself of one of its subsidiaries in order to focus on its core business activities. Financial information relevant to the
The board of Hanging Valley plc wishes to take over Rattling Creek Ltd. Shown below are summarised financial data for the two companies:Hanging Valley’s earnings and dividends have been increasing
Two companies called Blur plc and Oasis plc are considering a merger. Financial data for the two companies are given below:The two companies have estimated that, due to economies of scale, the newly
The managing directors of Wrack plc are considering what value to place on Trollope plc, a company which they are planning to take over in the near future. Wrack plc’s share price is currently
Goldblade plc is about to launch a bid for Membrane plc. Both companies are in the light manufacturing industry. Goldblade plc is currently in the process of deciding how it will go about financing
It is 1 January 2010 and Magnet plc is in the process of divesting part of its operations via a proposed management buyout (MBO). The buyout team is currently looking for venture capital to finance
Recommend internal hedging methods that a company can use in order to reduce translation risk and transaction risk. (S-1)
What are the major differences between OTC options and traded options? (S-1)
A company is going to borrow £6m in three months’ time for a period of six months.It is afraid that interest rates will rise between now and the time that the loan is taken out. It intends to
Identify the factors that influence a company’s decision to hedge interest rate risk.(S-4)
Which factors determine whether a company, having decided to hedge its interest rate exposure, uses internal hedging methods or external instruments? If it decides to hedge interest rate risk
What are the drawbacks of hedging exchange rate risk by using a swap agreement?(S-4)
Carrycan plc must make a payment of $364 897 in six months’ time. It is currently 1 January. The company plans to hedge its transaction exposure and has collected the following information.By
Discuss the factors which influence the price of traded options.
Two companies, A and B, are considering entering into a swap agreement. Their borrowing rates are as follows:Company A needs a floating rate loan of £5m and B needs a fixed rate loan of £5m.(a)
Explain the difference between the nominal (or money) terms approach and the real terms approach to dealing with inflation in the context of investment appraisal.
Explain whether general or specific inflation should be taken into account in investment appraisal.
Discuss how sensitivity analysis can help managers to assess the risk of an investment project.
Discuss the use of risk-adjusted discount rates in the evaluation of investment projects.
Explain the meaning of the term ‘simulation’.
List the ways in which foreign direct investment decisions are different from domestic investment decisions.
Logar is considering the purchase of a machine which will increase sales by £110 000 per year for a period of five years. At the end of the five-year period, the machine will be scrapped. Two
Buddington Ltd is evaluating the purchase of a new machine and has the following information:(a) Calculate the internal rate of return of the project.(b) Assess the sensitivity of the purchase
Scot plc is planning to invest in Glumrovia and, because of risky nature of investments in this part of the world, it will require an after-tax return of at least 20 per cent on the project.Market
Brinpool plc has been invited to build a factory in the small state of Gehell by the government of that country. The local currency is the Ked (K) and data on current and expected exchange rates are
DK plc is evaluating the purchase of a freeze dryer. Packets of frozen food will be sold in boxes of eight and the following information applies to each box:The selling price and cost of the frozen
R plc plans to invest £1 million in new machinery to produce Product GF. Advertising costs in the first two years of production would be £70 000 per year and quality control costs would be 3 per
Ring plc is evaluating the purchase of a machine to produce Product MP3, to which the following information applies:Incremental fixed costs will be c25 000 per year. The machine will cost c850 000
GZ plc plans to build a factory in the USA for $3.4m. Additional investment in working capital of $500 000 would be needed and this would be financed by a loan from a US bank of $500 000. Annual
Ice plc has decided to expand sales in Northland because of increasing pressure in its domestic market. It is evaluating two alternative expansion proposals.Proposal 1 Ice plc could increase
Explain why certain levels of risk cannot be avoided even in a well-diversified portfolio.
The market currently yields a return of 10 per cent whereas Treasury bills yield 4 per cent. Shares of Lime Spider plc have a covariance of 7.5 with the market whereas the market has a variance of
Brown plc has been investing surplus funds in a small portfolio of equity shares over the past few years. Details of the portfolio are as follows.The current market return is 12 per cent and the
You are given the following data which refers to the performance of the FTSE 100 and two companies over the last financial year.Required:(a) Using the data above, calculate whether or not a
Mr Magoo is planning to invest £18m in one of two short-term portfolios. Both portfolios consist of four short-term securities from diverse industries. The correlation between the returns of the
The securities of companies Z and Y have the following expected returns and standard deviations:If the correlation coefficient between the two securities is +0.25, calculate the expected return and
Mr. Moroley has just finished reading a textbook about portfolio theory and he is keen to put his new-found knowledge into action with respect to savings of £1000 he wishes to invest. He has
You have the following information about the returns for the securities of Super Lux plc and the returns for the market:Given that the rate of return on Treasury bills is 8 per cent and that the
Five years ago, Eranio plc issued 8 per cent irredeemable bonds at their par value of£100. The current market price of these bonds is £92. If the company pays corporate tax at a rate of 30 per
Pollock has in issue 1 million ordinary shares, par value 25p and £100 000 of 8 per cent irredeemable bonds. The current ex-dividend market price of the ordinary shares is 49p per share and the
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