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business
corporate finance principles and practice

Questions and Answers of Corporate Finance Principles And Practice

Explain the difference between the nominal-terms approach and the real-terms approach to dealing with inflation in investment appraisal.
Thorne plc is planning to sell a new electronic toy. Non-current assets costing £700,000 would be needed, with £500,000 payable at once and the balance payable after one year. Initial investment in
Explain whether general inflation or specific inflation should be included in investment appraisal.
Swift has a cost of capital of 12 per cent and plans to invest £7m in a machine with a life of four years. The units produced will have a selling price of £9.20 each and will cost £6 each to make.
Explain the difference between risk and uncertainty.
Star has a cost of capital of 12 per cent and is evaluating a project with an initial investment of £375,000. The estimated net cash flows of the project under different economic circumstances and
WK plc is a UK company which plans to set up a manufacturing subsidiary in the small country of Parland, whose currency is the dollar. An initial investment of $5m in plant and machinery is needed.
Discuss how sensitivity analysis helps managers to assess the risk of an investment project.
Carbon plc is planning to buy a new machine and has found two that meet its needs. Each machine has an expected life of five years. Machine 1 would generate annual net cash flows (receipts less
Explain the attractions of leasing as a source of finance.
A company has in issue some 9 per cent bonds which are redeemable at nominal value of £100 in three years’ time. Investors require a yield of 10 per cent. What will be the current ex-interest
What is the gearing effect of warrants?
Explain how NPV and IRR investment appraisal methods deal with non-conventional cash flows.
Discuss the problem of choosing between mutually exclusive projects with respect to their net present values and internal rates of return.
Explain with the aid of a numerical example how linear interpolation can be used to determine the internal rate of return of a project.
Explain the distinction between hard and soft capital rationing, and outline the reasons why these conditions might occur.
Explain how the concept of the time value of money can assist a financial manager in deciding between two investment opportunities.
Calculate the following values assuming a discount rate of 12 percent:(a) £500 compounded for five years; (b) The present value of £500 received in five years’ time; (c) The present value of
What are the functions and areas of responsibility under the control of the financial manager?
Give examples to illustrate the high level of interdependence between the decision areas of corporate finance.
Given the following corporate objectives, provide a reasoned argument explaining which of them should be the main goal of the financial manager:(a) Profit maximization;(b) Sales maximization; (c)
Explain how a financial manager can, in practice, maximize the wealth of shareholders.
What is meant by the ‘agency problem’ in the context of a public limited company? How is it possible for the agency problem to be reduced in a company?
Which of the following will not reduce the agency problem experienced by shareholders?(a) Increased monitoring by shareholders; (b) Salary bonuses for directors based on financial performance; (c)
What goals might be pursued by managers instead of maximizing shareholder wealth?
Do you consider the agency problem to be relevant to UK public limited companies?
Describe the factors influencing the relative proportions of internal and external finance used in capital investment.
Recent capital market efficiency research has explored anomalies in share price behaviour. Briefly describe some of these anomalies and suggest possible explanations.
What is the relevance of the efficient market hypothesis for the financial manager?
Which of the following statements about capital market efficiency is not correct? (a) If a stock market is weak form efficient, chartists cannot make abnormal returns.(b) If a stock market is strong
Discuss the following statement: ‘It is not possible to test whether a stock market is strong form efficient. In fact, the existence of insider trading proves otherwise’.
Explain the meaning of the following terms: allocational efficiency, pricing efficiency and operational efficiency.
Discuss the following statement: ‘Ratio analysis using financial statements is pointless. Only economic value added gives a true measure of the financial performance of a company’.
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 (financial statements
Why is it difficult to test for strong form efficiency?
Describe three anomalies in share price behaviour.
Describe benchmarks that can be used when assessing financial performance.
What are the potential problems associated with using ratio analysis to assess the financial health and performance of companies?
Explain the meaning of economic value added (EVA). How can EVA help financial managers create value for shareholders?
Explain the different working capital funding policies that a company may adopt.
Describe the cash conversion cycle and explain its significance in determining the working capital needed by a company.
Describe the main sources of short-term finance for a company.
Describe the strategies that could be followed by a company dealing with the problem of overtrading.
Discuss the possible reasons why a company might experience cash-flow problems and suggest ways in which such problems might be alleviated.
Explain why a company may choose to have reserves of cash.
Discuss ways in which a company might invest its short-term cash surpluses, explaining briefly the factors which it should consider in making its selection.
How might the creditworthiness of a new customer be checked?
Is it worth offering early settlement discounts to trade receivables to encourage prompt payment?
Explain the difference between factoring and invoice discounting.
Explain why the return required by ordinary shareholders is different from the return required by bondholders.
Briefly outline some of the important rights of ordinary shareholders.
Briefly explain the various ways in which a company may obtain a listing for its ordinary shares on the London Stock Exchange.
Companies often offer their shareholders a cash dividend and an equivalent scrip dividend. Briefly consider the advantages of scrip dividends from the point of view of: (a) The company; (b) The
Outline the advantages and disadvantages that should be considered by a currently unquoted company which is considering obtaining a listing on a stock exchange.
What are pre-emptive rights and why are they important to shareholders?
Discuss the advantages and disadvantages of a rights issue to a company.
A conversion of existing capital reserves into ordinary shares, which are then distributed pro rata to existing shareholders.’ This statement best defines: (a) Scrip dividends; (b) A rights
XTC is planning a 1 for 4 rights issue at a 20 per cent discount to the current market price of £2.50. If investors wish to sell their ‘rights per existing share’, how much should they sell them
Explain why preference shares are not popular as a source of finance for companies.
Which one of the following statements best describes a cumulative preference share? (a) It has the right to be converted into ordinary shares at a future date. (b) It entitles the shareholder to a
Matalan has acknowledged it may not be able to continue operating if it is unable to finance a significant chunk of its debts by January, despite a recovery in trading.The UK value retailer has
Consider a £100,000 bank loan at 10 per cent per year, repayable in equal annual instalments over five years. The annual repayment can be found by dividing the amount of the loan by the cumulative
Discuss briefly the key features of bonds such as debentures and loan stock.
Discuss, with the aid of a diagram, the relationship between the conversion premium, the rights premium and the market value of a convertible bond.

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