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essentials corporate finance
Corporate Finance 4th Edition David Hillier - Solutions
3 Explain what is meant by vertical, horizontal and conglomerate mergers. Review the motives for undertaking each type of merger and provide real examples of each case. (40 marks)
1 Suppose Hybrid shareholders will agree to a merger price of €68.75 per share. Should Birdie proceed with the merger?Birdie Golf has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of €550
2 What is the highest price per share that Birdie should be willing to pay for Hybrid?Birdie Golf has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of €550 million for Hybrid Golf. Both
3 Suppose Birdie is unwilling to pay cash for the merger but will consider an equity exchange. What exchange ratio would make the merger terms equivalent to the original merger price of €68.75 per share?Birdie Golf has been in merger talks with Hybrid Golf Company for the past six months. After
4 What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?Birdie Golf has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of €550 million for Hybrid
2 The HBOS–Lloyds TSB merger was one of the biggest in European banking history. Both banks had been hit hard by the global banking crisis in 2008 and the British government strongly encouraged them to merge in order to be safe enough to ride out the forthcoming recession. Both companies argued
1 Financial Distress Define financial distress using the value-based and flow-based approaches. Do you think these are appropriate definitions for financial distress? Explain.
2 What Happens in Financial Distress Review the turnaround strategies that firms can follow when in financial distress. Which do you think are most effective? Why?
3 Bankruptcy Liquidation and Administration What is the difference between administration and reorganization? What are some benefits of financial distress?
4 Private Workouts and Bankruptcy Do you think country-level institutional factors affect the turnaround strategies that financially distressed firms may adopt? What is the trade-off for policymakers between debtor-friendly and creditor-friendly bankruptcy law? Explain.
5 Predicting Financial Distress Review the variables and decision rule in Altman’s Z-score model.Why do you think these variables are important in predicting financial distress? Is Altman’s Z-score successful in correctly categorizing distressed and non-distressed firms?REGULAR
6 Financial Distress What do you think are the main causes of financial distress? Explain your answer using a case study firm of your choice.
7 APR and DIP Loans What is the absolute priority rule? What are DIP loans? Where do DIP loans fall in the APR?
8 Costs of Bankruptcy What are the costs to a company of financial distress? Discuss your answer using a case study company of your choice.
9 Bankruptcy Ethics Firms that are in financial distress can use ‘prepack’ arrangements, where the financially distressed firm sells its assets and then immediately declares that it wishes to stop trading.This action transfers the assets to a completely new firm but without the debts of the old
11 Bankruptcy versus Private Workouts Empirical evidence has shown that private workouts are faster and more cost-effective than a Chapter 11 bankruptcy procedure. Yet, according to Wruck (1990), more than half of financial restructurings in the United States occur in Chapter 11 rather than through
12 Administration When Beacon Computers entered insolvency, it had the following balance sheet information:Liquidating Value (£) Claims (£)Trade credit 3,000 Secured mortgage notes 6,000 Senior debentures 5,000 Junior debentures 9,000 Total assets 15,500 Book equity −7,500 Assuming there are no
13 Administration When Masters Printing filed for bankruptcy, it entered administration. Key information is shown below. As trustee what reorganization plan would you accept?Assets (£) Claims (£)Mortgage bonds 10,000 Senior debentures 6,000 Junior debentures 4,000 Going concern value 15,000 Book
14 Insolvency Look at Carillion’s Z-scores. If you were the chief financial officer of Carillion, what would you view as being the most important issue for the future viability of the company? Develop a turnaround plan and justify your proposal. Refer to Real World Insight 29.2 in your answer.
15 Z-score Models An analyst may argue that Carillion was a special case because so much of its business was with the British government. Given its importance to UK industry, the ratios should not have been taken literally because it was ‘too big to fail’. Critically assess this argument, and
16 Negative Equity Four of the Z-score variables were negative for Carillion. Does this explain why few people anticipated the insolvency before 2018? Explain. Why do you think Carillion wasn’t considered a risk in the years prior to the bankruptcy? Refer to Real World Insight 29.2 in your answer.
17 Net Working Capital In 2019, one year after the death of Carillion, its erstwhile competitors had the following Z-scores. What does this say about the health of Carillion’s industry?K.H. Group Holdings Ltd: 4.40;Dekpol SA: 1.77;Doosan Engineering & Construction Co Ltd:
18 Turnaround Strategies Firms that are in financial distress sometimes increase the size of their assets.Explain why firms would pursue such a strategy instead of a more standard cost-cutting approach.
19 Altman’s Z-score In 2019, Apple Inc. had the following data. Calculate its Altman Z-score. What can you say about the health of Apple Inc.?Total assets: $373,719 million Current assets: $140,828 million Current liabilities: $108,283 million Retained earnings: $80,510 million Earnings before
20 Private Equity Many publicly traded financially distressed firms are purchased by private equity funds and delisted from the stock exchange. Several years later they are brought back to the exchange for a new share listing. Why do you think private equity firms delist financially distressed
21 A listed company in which you have invested a lot of your personal wealth has just filed for insolvency.Using Altman’s Z-score analysis, would you have been able to predict its financial distress? What is your interpretation of the results? Are there any figures that would have given you cause
1 Assume that you had taken over the financial manager’s role in 2019. Would you have predicted that HealingTech plc would be in financial distress within a year? Explain.In 2020, the wearable technology firm, HealingTech plc, applied to go into administration. The decision was made when the
2 Assume now that you are in 2020 and the company has experienced a torrid year. What is the Z-score for the firm? Does this give you any insight into the risk or insolvency status of the firm?In 2020, the wearable technology firm, HealingTech plc, applied to go into administration. The decision
3 Now that you know HealingTech is in financial distress, what are the different turnaround strategies you would follow? What do you think is most appropriate in this particular case? Explain.In 2020, the wearable technology firm, HealingTech plc, applied to go into administration. The decision was
4 It is not difficult to find firms that are in financial distress. Download the financial accounts for five firms in your country that have performed poorly over the last year. Carry out a Z-score analysis for these companies. Now download the financial accounts for five firms that performed
1 Terminology Explain the difference between a domestic bond, a foreign bond and a Eurobond, and give an example of each.
2 Foreign Exchange Markets and Exchange Rates What is meant by triangular arbitrage? Is this likely to occur in real life? Explain.
3 Purchasing Power Parity Do you think purchasing power parity exists in the world economies?As country barriers fall, is purchasing power parity likely to become more prevalent? Does the empirical evidence support the PPP theory? Discuss.
4 Interest Rate Parity, Unbiased Forward Rates and the International Fisher Effect Review the international parity conditions. Which ones do you think are likely to exist and which are less likely to be valid? During a global recession, do you think they are less or more likely to be valid? Explain.
5 International Capital Budgeting Should international capital budgeting projects be assessed from the perspective of a multinational’s subsidiary, or from the parent company? Are there any circumstances under which this would change? Explain.
6 Exchange Rate Risk In 2016 the British pound depreciated by approximately 20 per cent as a result of the British vote to leave the EU. In your opinion, did the depreciation in sterling damage the UK economy?Are exchange rate movements necessarily good or bad for a country? Explain.
7 Political Risk Why is country risk analysis important? Can multinationals reduce their exposure to country risk? As a result of Brexit, many companies announced contingency plans to move their headquarters elsewhere in Europe. Why did you think they did this? Explain.
8 Islamic Financing Explain what is meant by Islamic financing. What are the different types of securities that are used in this sector? In this context, explain what is meant by a ‘sukuk’. Construct a practical example of a sukuk and explain the issues that arise in its use. [Challenge:
9 Spot and Forward Rates Suppose the exchange rate for the Australian dollar is quoted as $AUS3/£ in the spot market and $AUS4/£ in the 90-day forward market.(a) Is the British pound selling at a premium or a discount relative to the Australian dollar?(b) Does the financial market expect the
10 Purchasing Power Parity Suppose the rate of inflation in the Eurozone will run about 3 per cent higher than the UK inflation rate over the next several years. All other things being the same, what will happen to the euro versus pound exchange rate? What relationship are you relying on in
11 Exchange Rates The exchange rate for the Australian dollar is currently A$0.9641/US$. This exchange rate is expected to rise by 10 per cent over the next year.(a) Is the Australian dollar expected to get stronger or weaker?(b) What do you think about the relative inflation rates in the US and
12 Bulldog Bonds Which of the following most accurately describes a Bulldog bond?(a) A bond issued by Vodafone in Frankfurt with the interest payable in British pounds.(b) A bond issued by Vodafone in Frankfurt with the interest payable in euros.(c) A bond issued by BMW in Germany with the interest
14 Islamic Financing Explain why leasing is consistent with Islamic financing principles. [Challenge: Explain what is meant by a ‘musharakah’ transaction in Islamic finance. Give an example to illustrate your answer.]
15 Multinational Corporations Given that many multinationals have much greater sales outside their domestic markets than within them, what is the particular relevance of their domestic currency?
16 Exchange Rate Movements Are the following statements true or false? Explain why.(a) If the central bank decreases interest rates in the United Kingdom, but holds them constant in the United States, then we would expect the pound to depreciate relative to the dollar.(b) Suppose you are a German
17 Exchange Rate Movements Some countries encourage movements in their exchange rate relative to those of some other countries as a short-term means of addressing foreign trade imbalances. For each of the following scenarios, evaluate the impact the announcement would have on a Danish importer and
21 FX Risk What are the types of foreign exchange risk a multinational faces? How do these risks arise? Explain.
22 International Borrowing If a South African firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in South Africa? How would you overcome them?
24 Eurobonds Explain motives companies might have for raising money on the international bond markets.
25 Using Exchange Rates Take a look back at Figure 30.1 to answer the following questions.(a) If you have €100, how many British pounds can you get?(b) How much is one pound worth against the euro?(c) If you have £5 million, how many euros do you have?(d) Which is worth more, a Trinidad and
26 Using the Cross-rate Use the information in Figure 30.1 to answer the following questions.(a) Which would you rather have, €100 or £100? Why?(b) Which would you rather have, 100 Swiss francs (SFr) or 100 Swedish krona (SKr)? Why?(c) What is the cross-rate for Swiss francs in terms of Swedish
27 Forward Exchange Rates Use the information in Figure 30.1 to answer the following questions.(a) If the three-month forward rate for the US dollar per euro F90 = $1.3215 (per €), is the dollar selling at a premium or a discount? Explain.(b) If the three-month forward rate for British pounds in
29 Cross-rates and Arbitrage Use Figure 30.1 to answer the following questions.(a) What is the cross-rate in terms of Rwandan franc per Thai baht?(b) Suppose the cross-rate is 12 Rwandan franc = 1 Thai baht. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the
30 Interest Rate Parity Use Figure 30.1 to answer the following question. Suppose interest rate parity holds and the current annual risk-free rate in the Eurozone is 3.8 per cent. Assume the UK one-year forward rate is £0.8251. What must the annual risk-free rate be in the UK?
31 Interest Rates and Arbitrage The treasurer of a major British firm has £30 million to invest for three months.The annual interest rate in the United Kingdom is 0.45 per cent per month. The interest rate in the Eurozone is 0.6 per cent per month. The spot exchange rate is €1.12/£, and the
32 Inflation and Exchange Rates Suppose the current exchange rate for the Polish zloty is Z5.1134/£.The expected exchange rate in three years is Z5.2/£. What is the difference in the annual inflation rates for the United Kingdom and Poland over this period? Assume that the anticipated rate is
33 Exchange Rate Risk Suppose your company, which is based in Nantes, imports computer motherboards from Singapore. The exchange rate is given in Figure 30.1. You have just placed an order for 30,000 motherboards at a cost to you of 158.5 Singapore dollars each. You will pay for the shipment when
34 Exchange Rates and Arbitrage Suppose the spot and six-month forward rates on the Swedish krona are SKr10.7917/£ and SKr12.00/£, respectively. The annual risk-free rate in the United Kingdom is 2.5 per cent, and the annual risk-free rate in Sweden is 1.13 per cent.(a) Is there an arbitrage
36 Spot versus Forward Rates Suppose the spot and three-month forward rates for the Indian rupee are R68.81/€ and R61.8/€, respectively.(a) Is the rupee expected to get stronger or weaker?(b) What would you estimate is the difference between the inflation rates of the Eurozone and India?
37 Expected Spot Rates Suppose the spot exchange rate for the Tanzanian shilling is TSh2500/£.The inflation rate in the United Kingdom is 3.5 per cent and it is 8.6 per cent in Tanzania. What do you predict the exchange rate will be in one year? In two years? In five years? What relationship are
38 Forward Rates The spot rate of foreign exchange between the United States and the United Kingdom is$1.6117/£. If the interest rate in the United States is 13 per cent and it is 8 per cent in the United Kingdom, what would you expect the one-year forward rate to be if no immediate arbitrage
40 Islamic Financing You plan to raise funds through following Islamic principles. You require funding today of 3 billion Bahrain dinars and would like to pay it back in equal amounts over 10 years in monthly instalments. How would you do this?
41 Capital Budgeting As a German company, you are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SFr27.0 million. The cash flows from the project would be SFr7.5 million per year for the next five years. The euro required return
42 Murabahah You manage an Islamic financing division and have been approached by a company for funding of 6 billion Bahrain dinars. The company wishes to pay the funding back in equal instalments over 10 years through Islamic principles. Western banks quote comparable interest-paying loans of 8
43 Ijarah Thumma Al Bai’ You run an Islamic financing division and have been approached by a customer for a 40,000 Bahrain dinar ijarah thumma al bai’ financing deal. The customer wishes to pay a maximum of 1,000 Bahrain dinars per month over five years. Comparable loans in Western banks are
44 Bai’ Al-Inah You run an Islamic financing bank and have been approached by a company to construct a sale and buyback financing deal. The firm requires financing of £8 billion and wishes to pay back the financing over seven years. Comparable Western loans quote 7 per cent interest for
1 Calculate the percentage appreciation of the euro against the dollar over the previous year. Calculate the percentage appreciation of sterling against the dollar over the previous year. (20 marks)On 24 April 2019, the €/$ exchange rate was €0.89/$ compared to €0.82/$ exactly one year
2 Calculate the percentage appreciation or depreciation of sterling against the euro over the previous year. Calculate the percentage appreciation or depreciation of the euro against sterling over the previous year. (20 marks)On 24 April 2019, the €/$ exchange rate was €0.89/$ compared to
3 Does the percentage appreciation or depreciation of sterling in (1) equal the euro depreciation or appreciation in (2) multiplied by negative one? Explain your answer. (20 marks)On 24 April 2019, the €/$ exchange rate was €0.89/$ compared to €0.82/$ exactly one year before. On the same day,
4 Review the international parity conditions. Do you believe they work? Explain. (40 marks)On 24 April 2019, the €/$ exchange rate was €0.89/$ compared to €0.82/$ exactly one year before. On the same day, the £/$ exchange rate was £0.77/$ compared with £0.71/$ one year earlier.
2 What will happen to the company’s profits if the British pound strengthens? What if the British pound weakens?Larissa Warren, the owner of West Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company’s yachts in Europe. Jarek Jachowicz, the dealer, wants
3 Ignoring taxes, what are West Coast Yachts’ projected gains or losses from this proposed arrangement at the current exchange rate of €1.12/£? What will happen to profits if the exchange rate changes to€1.20/£? At what exchange rate will the company break even?Larissa Warren, the owner of
1 The Islamic Bank of Britain (IBB) released a new product in 2020 called a Home Purchase Plan (HPP).This product allows individuals to invest over the long term in a mortgage-equivalent financing deal.According to ITS publicity materials the Home Purchase Plan consists of two components:1
18 Agency Costs Tom Scott is the owner, chairman and primary salesperson for Scott Manufacturing.Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40 hours each week, the company’s profit before interest and taxes will be £500,000 per year; if he
19 Capital Structure and Growth Transvaal Ltd currently has debt outstanding with a market value of R980,000 and a cost of 10 per cent. The company has an EBIT of R98,000 that is expected to continue in perpetuity. Assume there are no taxes.(a) What is the value of the company’s equity? What is
20 Capital Structure and Non-marketed Claims Suppose the chief executive of the company in the previous problem stated that the company should increase the amount of debt in its capital structure because of the tax-advantaged status of its interest payments. His argument is that this action would
22 Agency Costs Kasna Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Kasna must choose between two mutually exclusive projects. Assume that the project Kasna chooses will be the firm’s
23 Financial Distress Good Time plc is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 per cent and the probability of a recession is 40 per cent.It is projected that the company will generate a total cash flow of £250 million
24 Personal Taxes, Bankruptcy Costs and Firm Value When personal taxes on interest income and bankruptcy costs are considered, the general expression for the value of a levered firm in a world in which the tax rate on equity distributions equals zero is:V L = V U + { 1 − [ (1 − t
25 Personal Taxes, Bankruptcy Costs and Firm Value Overnight Publishing SA (OP) has €2 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm’s debt is held by one institution that is willing to sell it back to OP
26 Islamic Financing Islamic financing forbids the use of interest in any financial security, and this will clearly have an impact on the capital structure decisions of firms that follow Shariah principles. At the same time, many Islamic securities have the same cash flows requirements as Western
27 Corporate Pension Plans Many firms have pension plans for their employees that are heavily in deficit(i.e., the asset value of the fund is less than the present value of its future pension payments). How does this affect the risk of firms? How would you incorporate the pension fund deficit or
28 Guaranteed Debt Many companies in emerging markets use AAA-rated firms in the West to guarantee any debt issue that is made by the firm. A good example is the Bakrie family in Indonesia, who used Bumi plc in the UK to guarantee a loan of $473 million. In 2012, the Bakrie family’s operations
29 Debt Buybacks Companies in financial distress often bring their leverage ratios down to much lower levels until such periods as they are able to turn around operations and generate profit. A strategy for a recovered company is to repurchase its own debt. If debt brings tax benefits and gearing
30 Market Timing Theory Look again at Figure 19.4. Can you provide a market timing interpretation to the distribution of gearing ratios in the diagram? Can you provide a more plausible or intuitive interpretation of the figures? Write a brief report, justifying your views.
1 Determine the expected earnings per share for the company before and after the debt issue. (20 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The company has never borrowed before but feels that, in order to maximize growth and increase value, a debt issue
2 Using your answer to part (1), discuss the use of earnings per share as a basis for financial decision taking.(20 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The company has never borrowed before but feels that, in order to maximize growth and increase
3 Determine the value of Biller Industries plc after restructuring and the value of its equity using the Modigliani–Miller model with corporate taxes. (15 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The company has never borrowed before but feels that,
4 Determine the cost of equity for Biller Industries plc before and after the debt issue. (15 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The company has never borrowed before but feels that, in order to maximize growth and increase value, a debt issue is
5 If the Miller (debt and taxes) model holds and capital gains tax is 28 per cent, corporation tax is 18 per cent and personal tax rate on interest income is 45 per cent, estimate the value of Biller Industries plc. (15 marks)Biller Industries plc is a global haulage equipment and scaffolding
6 Determine the personal tax rate on interest income at which the tax advantage of debt is zero. (15 marks)Biller Industries plc is a global haulage equipment and scaffolding manufacturer. The company has never borrowed before but feels that, in order to maximize growth and increase value, a debt
1 What is the expected value of the company in one year, with and without expansion? Would the company’s shareholders be better off with or without expansion? Why?Sam McKenzie is the founder and CEO of McKenzie Restaurants plc, a British company. Sam is considering opening several new
2 What is the expected value of the company’s debt in one year, with and without the expansion?Sam McKenzie is the founder and CEO of McKenzie Restaurants plc, a British company. Sam is considering opening several new restaurants. Sally Thornton, the company’s CFO, has been put in charge of the
3 One year from now, how much value creation is expected from the expansion? How much value is expected for shareholders? For bondholders?Sam McKenzie is the founder and CEO of McKenzie Restaurants plc, a British company. Sam is considering opening several new restaurants. Sally Thornton, the
4 If the company announces that it is not expanding, what do you think will happen to the price of its bonds? What will happen to the price of the bonds if the company does expand?Sam McKenzie is the founder and CEO of McKenzie Restaurants plc, a British company. Sam is considering opening several
5 If the company opts not to expand, what are the implications for the company’s future borrowing needs?What are the implications if the company does expand?Sam McKenzie is the founder and CEO of McKenzie Restaurants plc, a British company. Sam is considering opening several new restaurants.
6 Because of the bond covenant, the expansion would have to be financed with equity. How would it affect your answer if the expansion were financed with cash on hand instead of new equity?Sam McKenzie is the founder and CEO of McKenzie Restaurants plc, a British company. Sam is considering opening
1 For this case study, you will need to access Yahoo! Finance. For your own country, choose an industry and find the debt to equity ratio of each company in the industry. Now choose another country and find the debt to equity ratios of all the companies in the same industry. Is the median leverage
1 Adjusted Present Value How is the APV of a project calculated? What about the FTE? What is the main difference between the APV, FTE and WACC?
2 Net Asset Value What is the main difference between net asset value and net present value? Why is net asset value important in mining investments?
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