Questions and Answers of Financial Management

What are the arguments for and against issuing a scrip dividend rather than a cash dividend?
Why do you think the law imposes limits on the amount that can be distributed as dividends?
Suppose that Merton plc (see Example9.1) replaces the £30m paid out as dividends by an issue of shares to new shareholders. Show the statement of financial position after the new issue and
Bio-tech Ltd, a private limited company, started trading in Year 1 and made a trading profit of £200,000 in this year. In Year 2, the business made a trading loss of £150,000 but made a profit on
It was mentioned in the chapter that the catering effect has been cited as a possible explanation as to why dividends seem to appear and then disappear from the financial landscape. Can you think of
Why might an increase in the dividend (D1) not lead to an increase in share price (P0)? (Think of the other variables in the equation.)
Gamma plc recently announced a dividend increase of 10 per cent. Can you think of threereasons why this announcement might be greeted with disappointment by shareholders?
There is one situation where even MM would accept that ‘a bird in the hand is worth two in the bush’ (that is, that immediate dividends are preferable). Can you think what it is? (Think of the
Traminer plc provides software solutions for the airline industry. At present, shares in the business are held by the senior managers and by a venture capital business. However, Traminer plc intends
What kind of costs may be borne by shareholders who invest in high dividend payout businesses?
To what extent is catering theory consistent with MM theory?
Why would managers use dividends as a means of conveying information about the business’s prospects? Why not simply issue a statement to shareholders? Try to think of at least one reason why
What role might dividends play in helping shareholders avoid these costs?
Often, shareholders are given the choice as to whether they wish to receive dividends in the form of cash or new shares. How might a business benefit by offering its shareholders this choice?
How can lenders go about restricting shareholders’ rights to dividends?
Williams Wholesalers Ltd currently asks its credit customers to pay by the end of the month after the month of delivery. In practice, customers take rather longer to pay – on average 70 days. Sales
What kinds of changes in the business environment might lead to a decision to change the level of investment in working capital? Try to identify three possible changes that could affect the working
Why might smaller businesses carry more excess working capital than larger ones? Try to think of at least one reason.
Hora plc holds inventories of a particular type of motor car tyre, which is ordered in batches of 1,200 units. The supply lead times and usage rates for the tyres are:The business wishes to avoid the
An electrical wholesaler sells a particular type of light switch. The annual demand for the light switch is 10,400 units and the lead time for orders is four weeks. Demand for the light switch is
Goliath plc is a food wholesaler. The most recent financial statements of the business are as follows:All sales and purchases are made on credit.The business is considering whether to grant extended
HLA Ltd sells 2,000 bags of cement each year. It has been estimated that the cost of holding one bag of cement for a year is £4. The cost of placing an order for new inventories is estimated at
Superlec plc makes electrical appliances. One of its major component suppliers is Technicalities Ltd. The two businesses have recently established a comprehensive JIT relationship.Would you expect
Try to identify at least three types of cost that may be incurred when adopting an ERP inventories’ management application.
In practice, there is always the danger that a customer may be slow to pay and yet may still take the discount offered. Where the customer is important to the business, it may be difficult to insist
Try to think of four possible factors that might influence the amount of cash that a business holds.
Why might a supplier prefer a customer to take a period of credit rather than pay for the goods or services on delivery? (There are probably two reasons.)
Romeo plc produced the following statement of financial position at the end of the third year of trading:An analysis of the underlying records reveals the following:1. R&D costs relating to the
Assume the same facts as in Activity 10.4. However, we are also told that the business maintains buffer inventories of 300 units. At what level should the business reorder?Data from Activity 10.4An
What are the conventional methods of measuring shareholder returns?
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
How might the directors’ attitude towards risk be affected by the business offering them share options?
Can you think why NPV analysis should also be relevant when considering the business as a whole?
Aquarius plc has estimated the following free cash flows for its five-year planning period:Required:How might it be possible to check the accuracy of these figures? What internal and external sources
Ceres plc is a large conglomerate which, following a recent strategic review, has decided to sell its agricultural foodstuffs division. The managers of this operating division believe that it could
Devonian plc has the following long-term capital structure as at 30 November Year 4:The business has no long-term loans.In the year to 30 November Year 4, the operating profit (profit before interest
If the net present value of future cash flows generated by the business represents the value of the business as a whole, how can we derive that part of the value of the business that is available to
Should managers take changes in the total market value of the shares (that is, share price × number of shares issued) over time as an indicator of shareholder value created (or lost)? Why?
Aries plc was recently formed and issued 80 million £0.50 shares at nominal value and loan capital of £24 million. The business used the proceeds from the capital issues to purchase the remaining
Libra plc has an estimated terminal value (representing cash flows beyond the planning horizon) of £100 million. What is the present value of this figure assuming a discount rate of 12 per cent and
It has been argued that many businesses are overcapitalised. If this is true, what may be the reasons for businesses having too much capital and how can EVA® help avoid this problem?
Virgo plc is considering introducing a system of EVA® and wants its managers to focus on the longer term rather than simply focus on the year-to-year EVA® results. The business is seeking your
Can you think of another simplifying assumption that may be used to help calculate the terminal value?
Leo plc is considering entering a new market. A new product has been developed at a cost of £5 million and is now ready for production. The market is growing and estimates from the finance
Can you think of any practical problems of adopting an SVA approach? Try to think of at least one.
A US exporter sold goods to a Belgian importer. The goods were invoiced in euros and the invoice was paid one month after it was issued. During the period between the issue of the invoice and its
Let us now assume that Yukon Inc (see Example13.2) wishes to manage the foreign exchange risk through the purchase of euros’ futures contracts. These contracts will be purchased immediately and
The directors of Kifaru plc are considering taking over Mpaka plc, a smaller business in the same industry as Kifaru plc. Currently, Kifaru plc’s shares are trading at £6.40/share and Mpaka
Pisces plc produced the following statement of financial position and income statement at the end of the third year of trading:An analysis of the underlying records reveals the following:1. R&D
What can managers do in order to increase EVA®?
Centaur plc has 5 million shares in issue with a market value of £8.40 per share. The business has £14.2 million capital invested and EVA® for the most recent year was £1.8 million. The required
Why might part of the annual bonus be deferred on a compulsory basis? Try to think of at least one reason.
Can you think of any problems with using multiple measures to determine the annual bonus? Try to think of at least one.
Outline the case for and against a business pursuing a policy of diversification.
Accona plc operates a successful chain of furniture retail stores. For the year that has just ended, the business reported after-tax profits of £250 million. It has 200 million £0.50 shares in
Can you think of an example of each type of merger for a tyre retailer?
Ixus plc is a large sugar-refining business that is currently considering the takeover of Decet plc, an engineering business. Financial information concerning each business is as follows:The board of
It was mentioned in the chapter that, in the context of a planned takeover, the financial health of the target business is an important aspect of a due diligence investigation. Identify nine areas
Is it necessary for a business to merge with, or take over, another business in order to reap the benefits of scale? Can these benefits be obtained by other means?
When a business demerges part of its operations, it becomes smaller in size. What disadvantages might this bring to the business?
An investment business is considering taking a minority stake in two businesses, Monaghan plc and Cavan plc. Both are in the same line of business and both are listed on the London Stock Exchange.
Why might there still be an argument in favour of a merger, even though a business could overcome any deficiency on its own?
Lampet plc trades its shares on the London Stock Exchange. Recently, the chief financial officer calculated the value of a share in the business, using the free cash flow method, at £8.65. These
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
Which particular group might benefit most from diversification?
Following a successful bid, what is the likelihood of the senior managers in(a) The bidding business, and(b) The target business benefiting from the merger?
Why might a bidding business be prepared to pay a premium above the market price for the shares of a business? Try to think of at least two reasons.
What might be the attraction of this form of loan capital from the point of view of the target business’s shareholders?
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
What problem would arise if there was a fall in the market value of the shares?
Mojave plc supplies frozen desserts to supermarkets and restaurant chains throughout the UK. The business has enjoyed strong growth since it was formed six years ago and is now considering a listing
What different forms of payment do you think may be used?
Alpha plc, a dynamic, fast-growing business in microelectronics, has just made a bid of 17 of its own shares for every 20 shares of Beta plc, which manufactures a range of electric motors.Financial
How might the managers of a business seek to increase efficiency and profitability?
Can you think of a type of business that may be particularly susceptible to this reverse synergy problem?
Why might the managers experience a conflict of interest?
Derriford (Engineering) plc is expected to announce a dividend of £0.40 per share for the forthcoming year. The cost of equity is estimated at 12 per cent. What is the estimated market value of an
Why, for a UK business, might a customer based in Mumbai pose greater problems than one based in Middlesbrough?
Jurassic plc, a UK business, expects to receive €500,000 in three months’ time for goods sold to a French customer. It has decided to hedge the currency risk by taking out a forward contract. The
Why might a UK business achieve its objectives more effectively by internationalising its activities?
Planters plc manufactures agricultural implements, components for which are acquired from a number of sources, including some overseas ones. The implements are marketed in the UK and, increasingly,
Suppose that you had a few dollar bills left following a visit to the USA and exchanged these for sterling with a friend who was shortly to go there. Would you and your friend form part of the
Yukon Inc. is a US-based shipping business that operates throughout the world. In recent years, heavy demand for commodities, particularly among developing nations, has created significant
What are the advantages of doing nothing in relation to exchange rate risk? Under what circumstances might this approach be most suitable?
A French business is due to pay $3 million in six months’ time to a US supplier. In order to hedge against currency risk, the French business decides to sell euro futures immediately at €1 =
Why do foreign exchange dealers typically offer both a spot rate and a forward rate?
Tetron plc, a UK business, has purchased goods from an Italian supplier. This requires payment of €400,000 in two months’ time. The business intends to take out an option at a strike price of £1
What other role might speculators play in the smooth functioning of the foreign exchange market?
Mithras plc is a UK business that is due to receive €200,000 from a German customer in three months’ time. A money market hedge will be used to manage currency risk and the following borrowing
Although portfolio theory suggests that international diversification is best undertaken by shareholders, is this always the case? Can you think of a situation where shareholders may benefit from a
Farndale plc is a UK supermarket chain with subsidiaries in a number of different countries.Some years ago, the business entered the US market but the financial results proved to be disappointing. As
Hutton plc, a UK business, is due to receive €800,000 in four months’ time for goods supplied to a Spanish customer. The business has decided to use a money market hedge to manage currency risk.
Larunda plc operates a shipyard in the UK and has recently completed the building of a passenger ferry for a French business. The ferry has successfully completed its sea trials and final payment of
Try to think of at least two other forms insurance that a business might consider necessary.
Girton plc is a UK business that has recently purchased machinery from a US supplier. Girton plc expects to pay $600,000 in three months’ time for this purchase. To hedge against foreign exchange
Can you recall the nature of interest rate swaps? How do they differ from currency swaps?
Compare and contrast the main features of forward exchange contracts with those of currency futures.
Briefly describe VBBD and VBID.
Briefly describe the key features of the text designed to enhance the learning experience.
1. What is the role of financial management in today's health services organizations?2. How has this role changed over time?

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