New Semester
Started
Get
50% OFF
Study Help!
--h --m --s
Claim Now
Question Answers
Textbooks
Find textbooks, questions and answers
Oops, something went wrong!
Change your search query and then try again
S
Books
FREE
Study Help
Expert Questions
Accounting
General Management
Mathematics
Finance
Organizational Behaviour
Law
Physics
Operating System
Management Leadership
Sociology
Programming
Marketing
Database
Computer Network
Economics
Textbooks Solutions
Accounting
Managerial Accounting
Management Leadership
Cost Accounting
Statistics
Business Law
Corporate Finance
Finance
Economics
Auditing
Tutors
Online Tutors
Find a Tutor
Hire a Tutor
Become a Tutor
AI Tutor
AI Study Planner
NEW
Sell Books
Search
Search
Sign In
Register
study help
business
essentials corporate finance
Corporate Finance 4th Edition David Hillier - Solutions
3 Weighted Average Cost of Capital Is WACC consistent with a target debt–equity ratio? Explain.
4 APV, FTE and WACC Compare and contrast the three methods of capital budgeting. What are their strengths and weaknesses? When and why should you use each method instead of the other two? Are the three methods consistent when a firm does not have a target debt-to-equity ratio? Explain.
5 Discount Rate in Capital Budgeting Review the steps required in calculating the correct discount rate for capital budgeting when a firm has a high level of debt in its capital structure.
6 Beta and Leverage What are the two types of risk that are measured by a levered beta?REGULAR
7 Capital Budgeting You are determining whether your company should undertake a new project and have calculated the NPV of the project using the WACC method when the CFO, a former accountant, notices that you did not use the interest payments in calculating the cash flows of the project. What
8 NPV and APV Zoso is a rental car company that is considering whether to add 25 cars to its fleet. The company depreciates all its rental cars using 20 per cent reducing balance, and at the end of five years assumes that the cars will be sold at residual value. The new cars are expected to
9 NPV Capital Budgeting Culdesac NV has developed a design for new wireless noise-reducing earphones and is considering whether it should replace its existing wired earphones, whose popularity has decreased in the last year. The company publishes its financial accounts at 31 December, and today is
10 APV Gemini plc, an all-equity firm, is considering a €2.4 million investment that will be depreciated according to 25 per cent reducing balances. At the end of its four-year life, the investment will be sold for its residual value. The project is expected to generate earnings before taxes and
11 Flow to Equity Milano Pizza owns three identical restaurants popular for their specialty pizzas.Each restaurant has a debt–equity ratio of 40 per cent and makes interest payments of €29,500 at the end of each year. The cost of the firm’s levered equity is 19 per cent. Each store estimates
14 Beta and Leverage Maersk A/S and Lundberg A/S would have identical equity betas of 0.9 if both were all equity financed. The market value information for each company is shown here:Maersk A/S (DKr) Lundberg A/S (DKr)Debt 11,400,000 25,600,000 Equity 25,600,000 11,400,000 The expected return on
15 NPV of Loans Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a six-year, 13 per cent loan with gross proceeds of €9,000,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 1 per cent of gross proceeds and will be amortized using a 25 per
17 NPV for an All-equity Company Shattered Glass plc is an all-equity firm. The cost of the company’s equity is currently 22 per cent, and the risk-free rate is 3 per cent. The company is currently considering a project that will cost £8 million and last five years. The project will generate
18 WACC XYZ plc is considering purchasing new equipment that would cost £40 million. The expected unlevered cash flows from this investment are £13 million per annum for the next five years. The company’s stock returns have a covariance with the market portfolio of 0.048. The standard deviation
19 WACC Bolero plc has compiled the following information on its financing costs:Type of Financing Book Value (£) Market Value (£) Cost (%)Long-term debt 2,000,000 2,000,000 3.5 Short-term debt 9,000,000 8,000,000 6.8 Ordinary shares 6,000,000 22,000,000 14.5 Total 17,000,000 32,000,000 The
20 NAV Letlago plc has established a joint venture with Wannako Ltd to build a new gold mine in Kenya. The initial investment in paving equipment is £12 million. The equipment will be depreciated using the 20 per cent reducing balance method over its economic life of five years, at the end of
21 NAV For the company in the previous problem, what is the value of being able to issue subsidized debt instead of having to issue debt at the terms it would normally receive? Assume the face amount and maturity of the debt issue are the same.
22 APV MVP GmbH has produced football supplies for more than 20 years. The company currently has a debt–equity ratio of 50 per cent and is in the 29.8 per cent tax bracket. The required return on the firm’s levered equity is 16 per cent. MVP is planning to expand its production capacity. The
23 WACC Neon Corporation’s share price returns have a covariance with the market portfolio of 0.048. The standard deviation of the returns on the market portfolio is 20 per cent, and the expected market risk premium is 7.5 per cent. The company has bonds outstanding with a total market value of
25 APV, FTE and WACC Mojito Mint Company has a debt–equity ratio of 0.45. The required return on the company’s unlevered equity is 17 per cent, and the pre-tax cost of the firm’s debt is 9 per cent. Sales revenue for the company is expected to remain stable indefinitely at last year’s level
26 APV, FTE and WACC Lone Star Industries has just issued £160,000 of perpetual 10 per cent debt and used the proceeds to repurchase equity. The company expects to generate £75,000 of earnings before interest and taxes in perpetuity. The company distributes all its earnings as dividends at the
27 Projects that Are Not Scale Enhancing Blue Angel Ltd, a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of 0.40, but the industry target debt–equity ratio is 0.35. The industry average beta is 1.2. The market risk
28 Equivalence of WACC and APV Read the paper by M. Massari, F. Roncaglio and L. Zanetti, ‘On the Equivalence between the APV and the WACC Approach in a Growing Leveraged Firm’, European Financial Management, Vol. 14, No. 1, 2008, pp. 152–162. Provide an overview of the main findings and
29 Equivalence of WACC and APV Select a range of empirical studies on capital budgeting and discuss their findings. What, in your opinion, are the most interesting findings?
30 NPV After graduating from university you get a job for a non-dividend paying company which has recently listed on the stock exchange. Your manager tells you that the company does not favour the NPV approach to capital budgeting. Do you think this is a good decision by the company’s management?
1 Their first option concerns the use of debt financing. The underwriters suggest that a 10-year bond issue with a 7 per cent coupon may be a sensible route to raising these funds. If interest payments are tax deductible and the tax rate is 26.33 per cent, estimate the required rate of return for
2 The second option relates to equity financing. The underwriters believe that, if the company were to issue shares to fund the proposed project, they would have to be sold at a discount of 20 per cent. Issue expenses will be 1 per cent of the funding requirement. Estimate the return required by
3 Review the ways in which positive net present value opportunities may arise when a company wishes to raise funds in the financial markets. Use an example to illustrate your answer. (25 marks)Electrolar AB is planning to set up new operations in northern Sweden. Having established that the
4 Compare and contrast the strengths and weaknesses of the adjusted present value, weighted average cost of capital, and flow to equity approaches to investment appraisal. Which method, in your opinion, is the best? Explain. (25 marks)Electrolar AB is planning to set up new operations in northern
5 Cheek Products Ltd was founded 53 years ago by Joe Cheek, and originally sold snack foods such as crisps and biscuits. Through acquisitions, the company has grown into a conglomerate with major divisions in the snack food industry, home security systems, cosmetics and plastics. Additionally, the
6 We now return to our Cement example in Chapters 7 and 8. So far, we have gone with a consensus discount rate and assumed away any complications from leverage. The cement company for which you are carrying out consultancy has no debt funding. However, it wishes to borrow from a multinational bank
1 Different Types of Dividends Explain the difference between a cash dividend, a stock dividend, a special dividend and a stock buyback.
2 The Dividend Payment Process How is it possible that dividends are so important, but at the same time dividend policy is irrelevant? When a dividend is paid, give some reasons why the share price decline may not be the same as the actual dividend payment.
3 Disappearing Dividends Explain what is meant by the disappearing dividend phenomenon. What are the competing explanations for the phenomenon?
4 Share Repurchases Stock buybacks are happening in rapid succession among companies all over the world.Is this good or bad news for shareholders? Explain.
5 Dividends, Taxes, and other Real-world Factors Explain the importance of taxes in dividend policy.What are the real-world factors that would encourage firms to follow a high dividend policy?
6 Agency Theory and Payout Policy Explain the role of agency conflicts between managers, shareholders and bondholders in corporate payout policy.
7 Clienteles What is meant by dividend clienteles? If dividend clienteles exist, what does that imply for firms that adopt a new dividend policy in order to increase firm value?
8 Catering Theory What is the catering theory of dividends and how would it influence a manager looking to improve the value of her firm through dividend policy? What does the empirical evidence say about the catering theory?
9 Dividend Policy in Practice Under the assumptions set out by Modigliani and Miller, is a firm with a low payout dividend stream that uses retentions to finance investment more or less viable than a high payout firm that issues new issues to finance investment? Do you think dividend policy is
10 Stock Dividends and Stock Splits Why would firms have a reverse split? Should a reverse split have any impact on the value of the firm?REGULAR
12 Dividends and Clientele Bodyswerve plc has experienced significant performance gains over previous years and there is no reason to expect any different in the future. The firm has engaged with a potential investor to purchase its shares in the open market. However, the investor has argued that a
13 Dividends and Taxes You are approaching retirement and considering ways to minimize the tax bill from your investment portfolio. Assuming that you are only investing in equities within your own country, what is the best way to maximize your after-tax investment return? Explain.
14 Dividends versus Capital Gains It is clear in many countries that investors prefer dividend-paying stocks to those that pay no dividends. How do you explain this if dividend policy is irrelevant?
15 Dividend Irrelevancy ‘We must ensure that dividends do not fall from one year to the next, even if our company makes a loss. However, if we make a profit then we should increase the dividend.’ Does this statement make sense? Explain.
16 Share Repurchases MUG Company has a market capitalization of £1 billion and 20 million shares outstanding.Its board has decided to distribute £100 million to shareholders through a repurchase programme. How many shares will be repurchased?
18 Stock Dividends The shareholder equity accounts for Hexagon International are shown here:£Ordinary shares (£1 par value) 10,000 Capital surplus 180,000 Retained earnings 586,500 Total owners’ equity 776,500(a) If Hexagon shares currently sell for £25 per share and a 10 per cent stock
20 Stock Splits and Stock Dividends Eurasion Natural Resources Corporation currently has 2.4 million shares outstanding that sell for £5.16 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:(a) A three-for-two stock split?(b) An 8 per cent stock
21 Regular Dividends The balance sheet for Severn Trent plc is shown here in market value terms. There are 2.4 billion shares outstanding.Market Value Balance Sheet (£m)Cash 5,045 Equity 4,022 Non-current assets 5,526 Liabilities 6,549 Total 10,571 Total 10,571 The company has declared a dividend
22 Share Repurchase In the previous problem, suppose Severn Trent plc has announced it is going to repurchase £1 billion worth of equity. What effect will this transaction have on the equity of the firm?How many shares will be outstanding? What will the price per share be after the repurchase?
23 Stock Dividends The market value balance sheet for KL Air is shown here. KL Air has declared a 20 per cent stock dividend. The equity goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 15,000 shares of equity outstanding. What will
25 Stock Splits In the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 70 cents per share cash dividend on the new (post-split) shares represents an increase of 10 per cent over last year’s dividend on the pre-split equity. What effect does this
26 Residual Dividend Policy Hillshire plc uses a residual dividend policy. (see problem 11). A debt–equity ratio of 0.60 is considered optimal. Earnings for the period just ended were £524,292 and a dividend of£50,000 was declared. How much in new debt was borrowed? What were total capital
27 Residual Dividend Policy Worthington AG has declared an annual dividend of 1.50 Swiss francs(SFr) per share. For the year just ended, earnings were SFr14 per share.(a) What is Worthington’s payout ratio?(b) Suppose Worthington has 12 million shares outstanding. Borrowing for the coming year is
28 Residual Dividend Policy Red Zeppelin plc follows a strict residual dividend policy (see problem 11).Its debt–equity ratio is 3.(a) If earnings for the year are £180,000, what is the maximum amount of capital spending possible with no new equity?(b) If planned investment outlays for the
29 Residual Dividend Policy Preti Rock SA predicts that earnings in the coming year will be €56 million.There are 12 million shares, and PR maintains a debt–equity ratio of 2.(a) Calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes
30 Dividends and Share Price Mann Company belongs to a risk class for which the appropriate discount rate is 10 per cent. Mann currently has 100,000 outstanding shares selling at £100 each. The firm is contemplating the declaration of a £5 dividend at the end of the fiscal year just begun. Assume
31 Homemade Dividends You own 2,000 shares of equity in Avondale Property plc. You will receive a £0.25 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of £0.75 per share.The required return on Avondale shares is 18 per cent. What is the current share price
32 Homemade Dividends In the previous problem, suppose you want only £400 total in dividends the first year. What will your homemade dividend be in two years?
34 Dividends and Firm Value The net income of Novis AS is 32,000 kroner (DKr). The company has 10,000 outstanding shares and a 100 per cent payout policy. The expected value of the firm one year from now is DKr1,545,600. The appropriate discount rate for Novis is 12 per cent, and the dividend tax
35 Dividend Policy Newcastle Autos plc has a current period cash flow of £4.2 million and pays no dividends.The present value of the company’s future cash flows is £72 million. The company is entirely financed with equity and has 1 million shares outstanding. Assume the dividend tax rate is
36 Dividend Smoothing Sharpe SA has just paid a dividend of €1.25 per share of equity. Its target payout ratio is 40 per cent. The company expects to have an earnings per share of €4.50 one year from now.(a) If the adjustment rate is 0.3 as defined in the Lintner model, what is the dividend one
38 Dividends and Taxes As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the equity goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One
39 Signalling through Corporate Payout Policy Miller and Rock (1985) put forward a signalling model of corporate payout policy. Critically evaluate this model, with specific reference to the theoretical and empirical literature that supports or contradicts the model.
1 You have been asked by a client to forecast the dividend per share of Clouds plc over the next three years.From initial investigation, you find out that the company paid a dividend of £1.00 per share last year.An examination of analysts’ earnings forecasts points to an expected earnings per
2 Review the reasons why corporations issue dividends when it appears from a tax perspective suboptimal to do so. (30 marks)
3 In recent years, share repurchases have become more common than cash dividends. Explain why you think this is so, using research you have read to support your answer. (30 marks)
2 Louis-Lucien believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Louis-Lucien’s proposals affect the company?
4 Another option discussed by Georges, Louis-Lucien and Katherine would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?
5 One way to value a share of equity is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minusb, where b is the ‘retention’ or ‘ploughback’ ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus the
6 Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or partnership?
50 Use the annual financial statements for three companies in your country to find the dividend payout ratio for each firm for the past three years. Why would these companies pay out a different percentage of income as dividends?
51 Dividend policy in itself is not affected by accounting standards, however the presentation of dividends is affected by IAS 1 Presentation of Financial Statements, IAS 27 Consolidated and Separate Financial Statements and IAS 33 Earnings per Share. Visit the IASPlus website (www.iasplus.com) for
1 IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments:Disclosure are exceptionally important for options. Since the potential exposure to losses from options can be significant, it is important their impact is reflected in a firm’s accounting statements.
1 How many different volatilities would you expect to see for the equity?You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production and distribution of lighting equipment and speciality products worldwide. Because of recent
2 Unfortunately, solving for the implied standard deviation is not as easy as Mal suggests. In fact, there is no direct solution for the standard deviation of the equity even if we have all other variables for the Black–Scholes model. Mal would still like you to estimate the implied standard
3 Are all of the implied volatilities for the options the same? (Hint: No.) What are the possible reasons that can cause different volatilities for these options?You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production and
4 After you discuss the importance of volatility on option prices, your boss mentions that he has heard of the FTSE 100 Volatility Index (VFTSE) on Euronext. What is the VFTSE and what does it represent?You are currently working for Clissold Industries. The company, which went public five years
5 Look for current option quotes for the FTSE 100 Volatility Index on Euronext. To find these, search on the Euronext website for the ISIN: QS0011052162. What does the implied volatility of a VFTSE option represent?You are currently working for Clissold Industries. The company, which went public
1 Describe and explain the type of option being sold by the developer. (15 marks)A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife centre. The safari centre will also include a hotel development. In order to generate operating capital, the developer is
2 Describe and explain the position held by the potential lodge owner as an option. (15 marks)A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife centre. The safari centre will also include a hotel development. In order to generate operating capital, the
3 Discuss the risks associated with this transaction to both the developer and the lodge owner. (15 marks)A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife centre. The safari centre will also include a hotel development. In order to generate operating
4 Suppose we purchased a right on one of the lodges during the inducement period, and it has just been discovered that a very rare type of lion has been discovered close to the lodge. Explain what you think will happen to the value of the right that you own. Is this contract in the money? Explain.
5 Suppose that the developer was selling two contracts. One contract permits you to purchase a lodge any time during the six-month period and the other allows you to purchase the lodge only at the end of six months. Which of the two contracts is worth more? Explain. (15 marks)A developer has just
6 To reduce your cash outflows shortly before it became public knowledge that the rare lions live near the lodge, you sign a contract with a colleague. This contract gives you the right to sell the lodge at any time in the next six months to your friend for TSh35million. Describe your position and
7 Describe the potential obligations associated with the options involving the developer and the two friends.Use diagrams to illustrate your answer. (10 marks)A developer has just acquired 60 acres of property in Ngorongoro to develop a safari wildlife centre. The safari centre will also include a
37 Put Delta In the chapter, we noted that the delta for a put option is N(d1 ) − 1. Is this the same thing as– N(– d1)? (Hint: Yes, but why?)38 Black–Scholes Put Pricing Model Use the Black–Scholes model for pricing a call, put–call parity, and the previous question to show that the
39 Black–Scholes An equity is currently priced at £50. The share will never pay a dividend. The risk-free rate is 12 per cent per year, compounded continuously, and the standard deviation of the share’s return is 60 per cent. A European call option on the share has a strike price of £100 and
34 Two-state Option Pricing and Corporate Valuation Strudler Property plc, a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be £500 million, but if the project is a failure the firm will be
35 Black–Scholes and Dividends In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black–Scholes option pricing model with dividends is:C= S × e −dt × N( d 1 ) − E × e −Rt × N( d 2 )d 1 = [ ln (S / E )
36 Put–Call Parity and Dividends The put–call parity condition is altered when dividends are paid.The dividend adjusted put–call parity formula is:S × e −dt + P = E × e −Rt + C where d is again the continuously compounded dividend yield.(a) What effect do you think
1 Options Many laypeople find the whole concept of options difficult to understand. Use a non-financial example to explain how options work and why they are so important for flexible decision-making. What are the types of option contracts corporations can buy? Why would a corporation buy these
2 American versus European Options What is the difference between an American and European option?Is an American call option on a dividend-paying stock always worth at least as much as its intrinsic value?How about for a European call option? Explain.
3 American Versus European Options Why is it that an American option is always worth the same as a European option? If it were not, what strategy could an arbitrageur use to profit?
4 Options and Asset Values Suppose that UK government bond yields unexpectedly rise. Ceteris paribus, what would happen to the value of call options and put options?
5 Option Quotes Normally the settlement price falls as the strike price increases for call options. Conversely, the settlement price generally increases as the strike price gets higher for put options. Explain why, using Table 22.1 as an example.
6 Option Combinations Why would a corporation wish to combine put and call options on a commodity?Provide an example of a case where this might happen.
7 Valuing Options Review the factors that affect the value of call and put options.
8 Option Pricing Why can’t you just value an option using discounted cash flows, as in net present value?
9 The Greeks What are the Greeks? Why are they important to a corporation?
10 Shares and Bonds as Options Show how a share of equity can be viewed as an option. Why is this perspective helpful?
Showing 1100 - 1200
of 4098
First
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Last
Step by Step Answers
Get 50% OFF
Claim Now
