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essentials corporate finance
Corporate Finance 4th Edition David Hillier - Solutions
23 Evaluating Credit Policy Bruce Jacks plc is in the process of considering a change in its terms of sale.The current policy is cash only; the new policy will involve one period’s credit. Sales are 70,000 units per period at a price of £530 per unit. If credit is offered, the new price will be
24 Credit Policy Evaluation Clapton Erich GmbH sells 3,000 pairs of running shoes per month at a cash price of €90 per pair. The firm is considering a new policy that involves 30 days’ credit and an increase in price to €91.84 per pair on credit sales. The cash price will remain at €90, and
25 Factoring The factoring department of Inter Scandinavian Bank (ISB) is processing 100,000 invoices per year with an average invoice value of €1,500. ISB buys the accounts receivable at 3.5 per cent off the invoice value. Currently 2.5 per cent of the accounts receivable turns out to be bad
27 Credit Analysis Silicon Wafers plc (SW) is debating whether to extend credit to a particular customer.SW’s products, primarily used in the manufacture of semiconductors, currently sell for £1,850 per unit.The variable cost is £1,200 per unit. The order under consideration is for 12 units
28 Credit Analysis Consider the following information about two alternative credit strategies:Refuse Credit Grant Credit Price per unit £51 £55 Cost per unit £29 £31 Quantity sold per quarter 3,300 3,500 Probability of payment 1.0 0.90 The higher cost per unit reflects the expense associated
29 NPV of Credit Policy Switch Suppose a corporation currently sells Q units per month for a cashonly price of P. Under a new credit policy that allows one month’s credit, the quantity sold will be Q’ and the price per unit will be P". Defaults will be π per cent of credit sales. The variable
30 Credit Policy The Wiggins Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 400 bicycles. The average cost to the shop of a bicycle is £280.The owner knows that only 97 per cent of the customers will be able to make their
31 Credit Policy Evaluation Dschungel AG is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Dschungel should proceed.The required return is 3 per cent per period.Current Policy New Policy Price per unit €75
32 Baumol Model Lisa Tylor, CFO of Purple Rain Co., concluded from the Baumol model that the optimal cash balance for the firm is $10 million. The annual interest rate on marketable securities is 5.8 per cent.The fixed cost of selling securities to replenish cash is $5,000. Purple Rain’s cash
33 Miller–Orr Model Gold Star Ltd and Silver Star Ltd both manage their cash flows according to the Miller–Orr model. Gold Star’s daily cash flow is controlled between £95,000 and £205,000, whereas Silver Star’s daily cash flow is controlled between £120,000 and £230,000. The annual
34 Credit Policy Netal Ltd has annual sales of 50 million rand, all of which are on credit. The current collection period is 45 days, and the credit terms are net 30. The company is considering offering terms of 2/10, net 30. It anticipates that 70 per cent of its customers will take advantage of
1 Leon Dung SA, a large fertilizer distributor based in the north of Spain, is planning to speed up collections from its customers located in the Castille y Leon region. A Vallidolid-area bank will provide this service for an annual fee of €25,000 plus 10 cents per transaction. The estimated
2 Based on the Miller–Orr model, describe what will happen to the lower limit, the upper limit and the spread(the distance between the two) if the variation in net cash flow grows. Give an intuitive explanation for why this happens. What happens if the variance drops to zero? (30 marks)
3 Given an annual interest rate of 4 per cent, a fixed order cost of €10 and total cash needed of €5,000, calculate the target cash balance using the Baumol model. How do you interpret your answer? (30 marks)
4 Dagmar Bamberger, the president of Schwarzwald AG, has been exploring ways of improving the company’s financial performance. Schwarzwald manufactures and sells office equipment to retailers. The company’s growth has been relatively slow in recent years, but with an expansion in the economy it
1 Reasons for Holding Cash Why do firms hold cash? What are the consequences of holding too little cash? Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash? Explain
2 Determining the Target Cash Balance Show, using both the Baumol model and the Miller–Orr model, how a firm can determine its optimal cash balance. What are the advantages and disadvantages of each?
3 Investing Idle Cash What options are available to a firm if it believes it has too much cash? How about too little?
4 Terms of the Sale Explain what is meant by the credit terms of a sale. Provide an example of a typical trade credit agreement.
5 Establishing a Credit Policy What steps are involved in establishing a credit policy?
6 Optimal Credit Policy Is it possible to have an optimal credit policy? In this context, discuss the total credit curve and its impact on a firm’s approach to trade credit.
7 Credit Analysis What are the ‘five Cs’ of credit? Give an example of what happens when one of the five Cs is not met. Are there any other factors a firm should consider?
8 Collection Policy How can a firm use an ageing schedule of payments to maximize its total collection of outstanding debtors?
9 Opportunity versus Trading Costs Konyagi plc has an average daily cash balance of £10,500.Total cash needed for the year is £65,000. The interest rate is 3 per cent, and replenishing the cash costs€17 each time. What are the opportunity cost of holding cash, the trading cost and the total
10 Costs and the Baumol Model Saint-Michel SA needs a total of €54,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off €20,000 in securities and transfers the cash in. The interest rate is 3 per cent per year, and selling off securities costs
11 NPV and Reducing Float Starthub Ltd has an agreement with its bank whereby the bank handles Rm500 million in collections a day and requires a Rm40,000,000 compensating balance. Starthub is contemplating cancelling the agreement and dividing its Malaysian activities so that two other banks will
12 Determining Optimal Cash Balances TByrne Ltd is currently holding €700,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by €360,000 per month. How much of the current cash holding should be retained, and how much should be used to increase the
13 Using Miller–Orr SlapShot plc has a fixed cost associated with buying and selling marketable securities of£100. The interest rate is currently 0.021 per cent per day, and the firm has estimated that the standard deviation of its daily net cash flows is £75. Management has set a lower limit
14 Using Baumol Grampian plc has a weekly cash requirement of £60,000. The cost of selling marketable securities to raise cash is £50. The interest rate is 7 per cent per annum. Determine the optimal order quantity and the optimal order period.
16 ACP and Accounts Receivable Dalglish plc sells earnings forecasts for British securities. Its credit terms are 2/10, net 30. Based on experience, 65 per cent of all customers will take the discount.(a) What is the average collection period for Dalglish?(b) If Dalglish sells 1,200 forecasts every
17 Terms of Sale A firm offers terms of 2/9, net 40. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if:(a) The discount is changed to 3 per cent(b) The credit period
18 ACP and Receivables Turnover Muziek Stad NV has an average collection period of 52 days. Its average daily investment in receivables is €46,000. What are its annual credit sales? What is the receivables turnover?
19 Early Payment Discount XYZ plc has recently won a very large order to supply a retail chain, called TT Ltd, with items over the next two years. The size of any order may vary considerably and XYZ are obliged to deliver within two days of an order being placed. This will mean that XYZ has to
20 Size of Accounts Receivable Baker Ginger Ltd sells on credit terms of net 25. Its accounts are, on average, nine days past due. If annual credit sales are £8 million, what is the company’s balance sheet amount in accounts receivable?
22 Credit Policy Evaluation Champions SA is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Champions should proceed. Describe the build-up of receivables in this case. The required return is 1.5 per
23 Evaluating Credit Policy Bruce Jacks plc is in the process of considering a change in its terms of sale.The current policy is cash only; the new policy will involve one period’s credit. Sales are 70,000 units per period at a price of £530 per unit. If credit is offered, the new price will be
24 Credit Policy Evaluation Clapton Erich GmbH sells 3,000 pairs of running shoes per month at a cash price of €90 per pair. The firm is considering a new policy that involves 30 days’ credit and an increase in price to €91.84 per pair on credit sales. The cash price will remain at €90, and
25 Factoring The factoring department of Inter Scandinavian Bank (ISB) is processing 100,000 invoices per year with an average invoice value of €1,500. ISB buys the accounts receivable at 3.5 per cent off the invoice value. Currently 2.5 per cent of the accounts receivable turns out to be bad
27 Credit Analysis Silicon Wafers plc (SW) is debating whether to extend credit to a particular customer.SW’s products, primarily used in the manufacture of semiconductors, currently sell for £1,850 per unit.The variable cost is £1,200 per unit. The order under consideration is for 12 units
28 Credit Analysis Consider the following information about two alternative credit strategies:Refuse Credit Grant Credit Price per unit £51 £55 Cost per unit £29 £31 Quantity sold per quarter 3,300 3,500 Probability of payment 1.0 0.90 The higher cost per unit reflects the expense associated
29 NPV of Credit Policy Switch Suppose a corporation currently sells Q units per month for a cashonly price of P. Under a new credit policy that allows one month’s credit, the quantity sold will be Q’ and the price per unit will be P". Defaults will be π per cent of credit sales. The variable
30 Credit Policy The Wiggins Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 400 bicycles. The average cost to the shop of a bicycle is £280.The owner knows that only 97 per cent of the customers will be able to make their
31 Credit Policy Evaluation Dschungel AG is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Dschungel should proceed.The required return is 3 per cent per period.Current Policy New Policy Price per unit €75
32 Baumol Model Lisa Tylor, CFO of Purple Rain Co., concluded from the Baumol model that the optimal cash balance for the firm is $10 million. The annual interest rate on marketable securities is 5.8 per cent.The fixed cost of selling securities to replenish cash is $5,000. Purple Rain’s cash
33 Miller–Orr Model Gold Star Ltd and Silver Star Ltd both manage their cash flows according to the Miller–Orr model. Gold Star’s daily cash flow is controlled between £95,000 and £205,000, whereas Silver Star’s daily cash flow is controlled between £120,000 and £230,000. The annual
34 Credit Policy Netal Ltd has annual sales of 50 million rand, all of which are on credit. The current collection period is 45 days, and the credit terms are net 30. The company is considering offering terms of 2/10, net 30. It anticipates that 70 per cent of its customers will take advantage of
1 Leon Dung SA, a large fertilizer distributor based in the north of Spain, is planning to speed up collections from its customers located in the Castille y Leon region. A Vallidolid-area bank will provide this service for an annual fee of €25,000 plus 10 cents per transaction. The estimated
2 Based on the Miller–Orr model, describe what will happen to the lower limit, the upper limit and the spread(the distance between the two) if the variation in net cash flow grows. Give an intuitive explanation for why this happens. What happens if the variance drops to zero? (30 marks)
3 Given an annual interest rate of 4 per cent, a fixed order cost of €10 and total cash needed of €5,000, calculate the target cash balance using the Baumol model. How do you interpret your answer? (30 marks)
4 Dagmar Bamberger, the president of Schwarzwald AG, has been exploring ways of improving the company’s financial performance. Schwarzwald manufactures and sells office equipment to retailers. The company’s growth has been relatively slow in recent years, but with an expansion in the economy it
What is Corporate Finance? What are the main elements of corporate finance? How might these elements relate to typical family life?
Introduction to Corporate Finance Which of the following is not a core element of corporate finance?(a) The investment decision(b) The equity decision(c) The financing decision(d) Short-term capital management
Goal of Financial Management Explain the assumption behind the statement: ‘The goal of financial management is to maximize the current share price.’ Why isn’t the goal to maximize the future share price?
Financial Markets Why do you think there are so many different types of financial markets? Would it not make sense to have just one global stock exchange where every equity was traded? What are the reasons why this would and wouldn’t happen in reality?REGULAR
Financial Markets Explain the difference between primary and secondary markets. Why should companies be interested in secondary markets if they don’t raise money directly for transactions that take place on them?
Corporate Finance in Action The section highlighting Alphabet as a case study is special in many ways because of the firm’s meteoric success. Extend the case study on Alphabet by looking at the title of each chapter in this book and then identifying a similar event or news story about the firm
Balance Sheet Equation Passenger plc has €619 million in current assets and €1,403 million in total assets. It has €338 million in current liabilities and €1,253 million in total liabilities. How much is the equity of Passenger plc worth? How much does it have in non-current assets and
Capital Structure In the previous question, Passenger plc announced that it plans to increase its noncurrent assets by €100 million. If the company wishes to maintain its ratio of total liabilities to equity, how much long-term debt should it issue?
Accounting and Cash Flows You work for a private airport that has just purchased a new radar system from the UK for £3.5 billion. You have paid £100 million up front with the rest to be paid in three months.Explain how these figures would appear on an accounting statement and a statement of cash
Timing of Cash Flows Your company has just entered into a 12-month contract to supply mobile telephones to all its staff. You have been given two payment options. The first is to pay £50,000 every month for 12 months.The second is to pay £600,000 at the end of the year. Which option should you
Risk of Cash Flows You are assessing the viability of two projects. Project A has a 25 per cent chance of losing €1,000,000, a 50 per cent chance of breaking even and a 25 per cent chance of making €1,000,000 profit. Project B has a 10 per cent chance of losing €2,000,000, an 80 per cent
Corporate Goals Explain what is meant by the triple bottom line. What are the main issues financial managers must consider when pursuing a triple bottom line perspective?
Triple Bottom Line Do you consider the triple bottom line to be important to a firm’s management?Explain.
Financing Goals As a firm progresses throughout its life cycle it will typically move from seeking investment from private sources towards raising money on the capital markets. Explain why this is the case.
Short-term Financing Goals In 2019, it was reported that Apple had more than $250 billion in cash. This was more than the whole GDP of Finland, which is the market value of all goods and services produced by the country in a year. Is this a problem for Apple? Explain.
Financial Management Goals You have read the first chapter of this textbook and have taken over a company that you now discover is losing £100,000 a week. At the rate things are going, the company will not have any cash left in six months to pay its creditors. What are your goals as a financial
Financial Management Goals Explain why shareholder wealth maximization is consistent with the triple bottom line concept. Are societal and environmental issues a necessary function of business? Explain.
Ethical and Non-ethical Funds You have just joined a graduate scheme in a fund management company, and your manager tells you that ethical funds do not significantly outperform non-ethical funds, according to the bulk of empirical evidence. How would you respond to your manager?
Financial Management Goals Many ‘experts’ suggest that maximizing profit should be the main financial goal of a corporation. Is this a correct view? Explain.
Financial Management Goals You have been manager of a small company for 20 years and have become great friends with your employees. In the last month, foreign owners have bought out the company’s founding owner and have told you that they need to cut costs in order to maximize the value of the
Goals of the Firm Your company’s new owners suggest the following changes to maximize the value of the firm. Write a brief report responding to each point in turn.(a) Add a cost of living adjustment to the pensions of your retired employees.(b) It is expected that high oil prices will increase
Dealer versus Agency Markets Explain the difference between dealer and agency markets. Why do you think both types of market exist? Is there one type of market that is the best? Explain.
Statement of Financial Position If a firm is to cut costs as a result of falling revenues, how would this appear in the statement of financial position? Explain.
Dual-class Shares The multinational media company News Corporation has a dual-class share structure.Why might the company do this? Are there any drawbacks?
Balance Sheet Equation You have the following information for the German engineering firm, thyssenkrupp AG. All figures are in millions of euros (€).2018 2017 Non-current assets 14,118 14,501 Current assets 20,347 20,546 Total assets 34,465 35,047 Current liabilities 16,796 17,097 Non-current
Balance Sheet Assume that thyssenkrupp AG increased its non-current assets by €1 billion in 2019 and at the same time reduced its current assets by €500 million. Review the ways in which thyssenkrupp would be able to finance this expansion. What would the balance sheet look like under each
Statement of Financial Position Assume that, in 2019, thyssenkrupp purchased a new automation technology for €500 million. It paid this on credit and won’t actually be due to pay for the automation technology until 2020. The managers of thyssenkrupp state that, in the future, any increase in
Statement of Financial Position Assume that, instead of fully financing the expansion with debt, the managers of thyssenkrupp say they wish to maintain the pre-transaction ratio of non-current liabilities to equity after the expansion. What would thyssenkrupp’s statement of financial position
Financial Market Regulators The UK’s financial markets regulator states that its objectives are to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal, and improve the country’s business capacity and effectiveness. The German financial markets regulator,
Balance Sheet Model of the Firm The layout of financial accounts is rarely the same across companies and, sometimes, it can be difficult to establish a simple picture of a firm’s balance sheet. The accounts below are for Rogik plc. Construct a simple balance sheet model of the firm in the same
Goals of a Financial Manager In 2012, the Argentinian government nationalized YPF, which is a subsidiary of Repsol, the Spanish oil giant. YPF was integral to the operations of Repsol. The firm was set up 10 years earlier and had received more than €20 billion of capital investment from Repsol.
Stock Exchanges The UK has a hybrid stock exchange where the largest companies are traded on an electronic order book and the smallest firms are traded through a competitive dealer market. Do you think this is a sensible system? If you were a new firm, on which system would you prefer to have your
Life Cycle of Firms Choose any company from your country and develop a chronology of the firm’s life cycle, from the business start-up, through initial expansion, to stock exchange listing, and then (if applicable) death through merger, acquisition or insolvency. For each stage, explain the
As a financial manager, what will be your main activities in her new company? (12 marks)
What will be your first priority? Explain. (12 marks)
Will the company need to invest money? Explain. (12 marks)
Will the company need financing? Explain. (12 marks)
How will the company raise financing? Is it sensible to list the company on the stock market or issue debt?What about bank loans? (12 marks)
What are the benefits of holding cash? (12 marks)
What should be the goal of the company? (12 marks)
The artist has said to you that she does not wish to run a company that does not contribute to society. She asks if it is possible to have corporate objectives that are broader than just maximizing profit. She asks you whether this is a sensible objective and, if not, are there other options to
For each firm, look at its statement of financial position and record the following:(a) Non-current assets(b) Current assets(c) Current liabilities(d) Non-current liabilities.Construct the balance sheet for each firm and calculate the value of shareholders’ equity. What do the figures say about
Find the share price of each firm. What does the share price history tell you about each company?A skill any financial manager must have is to be able to find and understand financial information. Choose three companies from your country. Download their financial accounts for the most recent year.
Read the news for each company. What does the news tell you about the fortunes of each company?A skill any financial manager must have is to be able to find and understand financial information. Choose three companies from your country. Download their financial accounts for the most recent year. At
Combining all the information, which company do you think is the best investment? Explain.A skill any financial manager must have is to be able to find and understand financial information. Choose three companies from your country. Download their financial accounts for the most recent year. At
Corporate finance has three main areas of concern:(a) Capital budgeting: What long-term investments should the firm take?(b) Capital structure: Where will the firm get the long-term financing to pay for its investments? Also, what mixture of debt and equity should it use to fund operations?(c)
The Norwegian firm Fjell ASA is considering expanding operations overseas, and is evaluating the Netherlands and South Africa as possible sites. The Netherlands is viewed as relatively safe, whereas operating in South Africa is seen as riskier. In both cases, the company would close down operations
The Italian firm Montana SpA is attempting to choose between two proposals for new products. Both projects will provide additional cash flows over four years and will initially cost €10,000. The cash flows from the proposals are as follows:Year New Product A (€) New Product B (€)1 0 4,000 2 0
Every company that needs cash must raise it from somewhere. In 2018, Siemens received a total of€4.2 billion by issuing new equity of its subsidiary Siemens Healthineers on the German stock exchange, Deutsche Börse.Why did Siemens choose to issue new equity? It based its decision on what would
The Berkeley Group is a large British building company focusing on new housing estate developments.The assets of Berkeley Group include not only buildings and property (tangible assets), but also the value of its brand and skilled workforce (intangible assets). In 2018, the company had £399.8
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