Questions and Answers of Financial Management

Contrast the various money market instruments.
Explain the role of investment bankers.
Describe the components of a public sale of securities.
Differentiate a best effort agreement from a firm commitment.
Explain the purpose of a shelf registration and a private placement.
Identify the regulatory body that enforces the federal securities laws.
State the primary purpose of the federal securities laws.
Trace the mechanics of a stock purchase or sale.
Given the following information, determine the balance on the U.S. current account and capital accounts: imports net income from foreign investments foreign investments in the United States
Solve time value of money problems.
Interpret the results of your solutions.
Use an interest table or a financial calculator.
Construct a loan amortization schedule.
You annually invest $1,500 in an individual retirement account (IRA) starting at the age of 20 and make the contributions for 10 years. Your twin sister does the same starting at age 30 and makes the
A company has two investment possibilities, with the following cash inflows:If the firm can earn 7 percent in other investments, what is the present value of investments A and B? If each investment
Inflation is a general increase in prices and may be measured by the Consumer Price Index (CPI). The following are several problems related to price increases.a. In 1984 the CPI was 100; 30 years
You have an IRA worth $200,000 and want to start to make equal annual withdrawals (that is, distributions from the account) for 20 years. You anticipate earning 5 percent on the funds. (To facilitate
You contribute $1,000 annually to a retirement account for eight years and stop making payments at the age of 25. Your twin brother (or sister . . . whichever applies) opens an account at age 25 and
The chief executive officer of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year:Required:(a) Show, by using the data given, how
Boswell Enterprises Ltd is reviewing its trade credit policy. The business, which sells all of its goods on credit, has estimated that sales revenue for the forthcoming year will be £3 million under
There is a further reason why certain accounting policies may be adopted rather than others. This reason was discussed in Chapter 3. Can you recall what it is?
What is the shareholder value figure for the business in Example 11.2? Would the sale of the shares at £11 per share really add value for the shareholders of Bortex plc?Example 11.2The directors of
Take a look again at the calculations. Why should we be cautious when drawing conclusions?
Can you work out the EVA® for the second year of Scorpio plc in Example 11.3?Example 11.3Scorpio plc was established two years ago and has produced the following statement of financial position and
Calculate the EVA® margin for the second year of Scorpio plc in Example 11.3.Example 11.3Scorpio plc was established two years ago and has produced the following statement of financial position and
Try to identify at least one practical problem that may arise when using SVA calculations to reward managers.
It was mentioned earlier that the EVA® generated during a period is rarely reported to shareholders. Why might this be a drawback for implementing a EVA®-based bonus scheme?
Why is it important to identify when the value was created and how could this be done?
How could the problems of time periods and scale mentioned above be overcome?
What benchmark would be most suitable?
Can you think of any circumstances under which re-issuing share options at a lower price to directors might be justified?
From the business viewpoint, is there a potential disadvantage to this feature of PSPs?
Advocates of the shareholder value approach argue that, by delivering consistent and sustainable improvements in shareholder value, a business will benefit several stakeholder groups. The performance
Which of the three types of mergers discussed above would achieve this objective? What are the potential problems of this kind of merger from the consumer’s point of view?
Why might shares in the bidding business lose value as a result of a takeover of a target business? Try to think of two reasons why this may be so.
What other reason might there be for rejecting a takeover bid?
We came across this tactic when discussing dividends in Chapter 9. Can you recall the reason why it might fail?
Calculate the net assets (book value) of an ordinary share in CDC Ltd.
Calculate the value of an ordinary share in CDC Ltd using the net assets (liquidation)method.
Calculate the value of an ordinary share in CDC Ltd using the net assets (replacement cost) method.
Calculate the value of an ordinary share in CDC Ltd using the P/E ratio method.
Calculate the value of an ordinary share in CDC Ltd using the dividend yield method.
Assume that CDC Ltd has a constant dividend payout and the cost of ordinary share capital is estimated at 12 percent. Calculate the value of an ordinary share in the business using the discounted
Calculate the value of an ordinary share in CDC Ltd using the free cash flow method.
Distinguish between a merger and a takeover.
Identify and discuss four reasons why a business may undertake divestment of part of its operations.
Identify four tactics the directors of a target business might employ to resist an unwelcome bid after the bid has been received.
When a business wishes to acquire another, it may make a bid in the form of cash, a share-for-share exchange, or loan capital-for-share exchange.Required:Discuss the advantages and disadvantages of
Dawn Raider plc has just offered one of its shares for two shares in Sleepy Giant plc, a business in the same industry as itself. Extracts from the financial statements of each business for the year
The directors of Simat plc have adopted a policy of expansion based on the acquisition of other businesses. The special projects division of Simat has been given the task of identifying suitable
Larkin Conglomerates plc owns a subsidiary, Hughes Ltd, which sells office equipment.Recently, Larkin Conglomerates plc has been reconsidering its future strategy and has decided that Hughes Ltd
The senior management of Galbraith Ltd is negotiating a management buyout of the business from the existing shareholders. The most recent financial statements of Galbraith Ltd are as follows:The
Why is wealth maximisation viewed as superior to profit maximisation as a business objective?
Look at Figure 1.3 and state, in broad terms, where an investment in:(a) a government savings account, and(b) a lottery ticket should be placed on the risk–return line. Return Risk Even at zero
Can you think why this may be the case?
What sort of interests might the directors pursue that would benefit themselves, but which may conflict with the interests of shareholders?
Can you think why directors pursuing their own interests, rather than those of shareholders, may be a problem for society as a whole?
Assume that the managers of a business are considering only one option. Could projected financial statements still help them?
Fill in the outline cash flow statement for Designer Dresses Ltd for the six months to 30 June using the information contained in Example 2.1.Example 2.1 Designer Dresses Ltd is a small business to
Fill in the outline projected statement of financial position for Designer Dresses Ltd as at 30 June using the information contained in Example 2.1 and in the answers to Activities 2.3 and
Evaluate the performance and position of Designer Dresses Ltd as set out in the projected financial statements. Pay particular attention to the projected profitability and liquidity of the business.
Prepare a projected statement of financial position for Burrator plc as at the end of Year 9.
The above suggests that the per-cent-of-sales method is best suited to a business with at least one of two possible characteristics. What might these be?
Why do you think managers are normally reluctant to make projected financial statements publicly available? Try to think of at least one reason.
Comment on the earnings per share results, under each of the three financing options, for the different levels of operating profit.
Given the most likely operating profit is £50 million, which financing option in Example 2.5 above would you choose and why?Example 2.5Hidalgo plc has recently been formed to manufacture washing
Calculate the indifference point between the low-geared and the high-geared financing options.
Calculate the degree of financial gearing at the most likely operating profit for Hidalgo plc for both the low-geared option and the all-share option.
What is the degree of financial gearing under the high-geared option when operating profits are:(a) £60m, and(b) £70m?
Can you think of at least three examples of operating costs that are likely to be variable for a manufacturing business?
What types of industries are likely to have high operating gearing?
See if you can calculate the indifference point for sales output between the two strategies set out in Example 2.7.Example 2.7Lethargo plc has recently been formed to produce vacuum cleaners. The
Calculate the degree of operating gearing for Strategy 2 at the different levels of sales output mentioned in Example 2.7.Example 2.7Lethargo plc has recently been formed to produce vacuum cleaners.
What steps might managers of a business take to reduce: (a) the level of financial gearing, and (b) the level of operating gearing where it is considered to be too high?
Semplice Ltd manufactures catering equipment for restaurants and hotels. The statement of financial position of the business as at 31 May Year 4 is as follows:The board of directors of Semplice Ltd
Newtake Records Ltd owns three shops selling rare jazz and classical recordings to serious collectors. At the beginning of June, the business had an overdraft of £35,000 and the bank has asked for
Eco-Energy Appliances Ltd started operations on 1 January and has produced the following forecasts for annual sales revenue:Required:Prepare projected cash flow statements of the business for each of
Which one of the above categories of ratios is likely to be most useful to short-term lenders?
Can you think of any bases that could be used to compare a ratio you have calculated from the financial statements of a business for a particular period?
Calculate the ROSF for Alexis plc for the year to 31 March 2016.
Calculate the ROCE for Alexis plc for the year to 31 March 2016.
Calculate the operating profit margin for Alexis plc for the year to 31 March 2016.
Calculate the gross profit margin for Alexis plc for the year to 31 March 2016.
Calculate the average inventories turnover period for Alexis plc for the year ended 31 March 2016.
Calculate the average settlement period for Alexis plc’s trade receivables for the year ended 31 March 2016.
Calculate the average settlement period for trade payables for Alexis plc for the year ended 31 March 2016.
Calculate the sales revenue to capital employed ratio for Alexis plc for the year ended 31 March 2016.
Calculate the sales revenue per employee for Alexis plc for the year ended 31 March 2016.
Show how the ROCE ratio for Alexis plc can be analysed into the two elements for each of the years 2015 and 2016. What conclusions can you draw from your figures?
Calculate the current ratio for Alexis plc as at 31 March 2016.
Calculate the acid test ratio for Alexis plc as at 31 March 2016.
What do you deduce from the liquidity ratios set out above?
Calculate the gearing ratio of Alexis plc as at 31 March 2016.
Calculate the interest cover ratio of Alexis plc for the year ended 31 March 2016.
Calculate the dividend payout ratio of Alexis plc for the year ended 31 March 2016.
Calculate the dividend yield for Alexis plc for the year ended 31 March 2016.
Set out below are ratios relating to three different businesses. Each business operates within a different industrial sector. Ratio Operating profit margin Sales to capital employed Average
Conday and Co. Ltd has been in operation for three years and produces antique reproduction furniture for the export market. The most recent set of financial statements for the business is set out as
Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2015 and 2016 are as follows:Required:(a) Calculate the following financial
The financial statements for Clarrods plc are given below for the two years ending 30 June 2015 and 30 June 2016. Clarrods plc operates a large chain of retail stores.Dividends paid on ordinary

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