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business
principles corporate finance
Corporate Finance Theory And Practice 2nd Edition Pierre Vernimmen, Pascal Quiry - Solutions
What is a standard financial analysis plan?
What standard ratios are applicable to all companies?
When is it possible to compare the EBIT of two companies?
What criticism can be directed at scoring techniques?
Why does the financial expense/EBITDA ratio play such a fundamental role in scoring techniques?
What are the strengths of a trends analysis?
Why start a financial analysis with a study of wealth creation?
Is financial analysis always doomed to be too late to be useful?
What is your view of the Italian proverb traduttore, traditore (to translate is to betray)?
Why will vertical integration be dismissed as being of little value after an analysis of the value chain?
What assumptions are made in a comparative financial analysis, especially on an international scale?
Carry out an analysis of the frozen chicken value chain and decide which participants in EXERCISES the value chain are in a structurally weak position. The main participants in the chicken value chain are as follows:◦ Research: genetic selection of the best laying hens.◦ Breeding of laying
Guizzardi is one of the main Italian producers of synthetic raincoats. It sells two product ranges – the fashion and the classic raincoat – through supermarkets. Most of the Guizzardi workforce is paid the minimum wage.(a) What is your view on the financial health of Guizzardi?(b) Would you be
Why can a direct link not be drawn between an increase in production costs and the corresponding drop in profits?
What steps can be taken to help offset the impact of a negative scissors effect?
Using the pro forma income statement, carry out a study on the impact that a high rate of inflation will have on earnings. Assume that the quantities sold by the company do not increase, but that sales prices and cash operating charges rise at the rate of inflation. Perform a careful study of
Of the following companies, which would you define as making “a margin between the end market and an upstream market”.◦ temporary employment agency◦ storage company (warehouse)◦ slaughterhouse◦ furniture manufacturer◦ supermarket
What does the stability of a company’s net profits depend on?
Van Poucke NV has positive EBITDA and growth, but negative operating profit. State your views.
What is your view of a company which has seen a huge increase in sales due to a significant drop in prices and a strong volume effect?
Why analyse minority interests on the consolidated income statement?
Why break down contributions made by associate companies into operating, financial and nonrecurring items?
In a growing company, would you expect margins to grow or to decrease?
A company’s net income, which was 0.2% of sales in year 1, leaps by 40% in year 2. State your views.
Would it be better for an oil refinery to finance its needs using equity or debt?
Would it be better for an Internet start-up company to finance its needs using equity or debt?
You are appointed financial director of a cement group which has no debts. What should you be concerned about?
You are appointed financial director of a cement group which has a fairly substantial amount of debts. What should you be concerned about?
Is personnel cost a variable or a fixed cost?
A major investment bank announces the best half-year results it has ever achieved.State your views.
Below are the income statements of four companies with the same level of sales, but with different production costs and financial structures.For each company, calculate the breakeven point, before and after financial costs, and the company’s position relative to its breakeven point. Sales
Below are the income statements for the Spanish Hoyos group. The company asks you to analyse these statements and answer the following questions:(a) What is your opinion of the company?(b) Is the company moving closer towards or further away from breakeven point?(c) In your view, is the company in
In January of year 0, the Swiss group Schmidheiny published the following projected figures:(a) Calculate the breakeven point for each year. The cost structure is as follows:◦ variable costs: raw materials used, outsourcing, 50% of other external services;◦ fixed costs: all other costs.(b)
Can it be said that the working capital calculated on the balance sheet is representative of the company’s permanent needs?
If income is recorded on a company’s books on the day it is received (and not on the invoice date) and costs on the date of payment, would this generate working capital? If so, how would this working capital differ from the working capital as calculated today?
Is the permanent part of working capital liquid?
Explain why, during a recession, working capital will decline at a slower pace than sales.
How does working capital behave in an inflationary period?
The financial director of a company makes the following comments: “The company performed remarkably well this year. You be the judge – our depreciation policy enabled us to generate 50% more EBITDA than last year. Our working capital has increased sharply, due to a more generous customer credit
The perfume division of Unilever has decided to launch a new perfume. During the first weeks following the launch, sales to retailers are high. Can the new perfume be considered a success?
An aeronautics group has substantial inventories of unfinished goods. What consequences will this have? What measures would you suggest to improve this situation?
Is calculating the ratio of nonoperating working capital/sales a worthwhile exercise?
Why is it imperative to analyse the cash flow statement?
Should capital expenditure level depend on cash flow from operating activities?
Your marketing manager suggests that you launch a marketing drive, giving some customers discounts and advantageous payment terms. State your views.
Is financial expense included in cash flow from operating activities?
Is a company with negative working capital illiquid?
In your view, should short-term debt be separated out from medium- to long-term debt on the cash flow statement? Why?
Short-term interest rates are currently very low and you are offered a 3-month loan.State your views.
The debt-to-equity ratio of Allied Domecq plc (spirits group) was 2.1 mid 2004. State your views.
Below are the key figures for company Ivankovic over the last five years.Draw up the cash flow statement for years 2005–2008.State your views. 2004 2005 2006 2007 2008 Fixed assets 100 110 120 130 140 Working capital 200 225 250 280 315 EBITDA 38 40 44 48 52 Depreciation and amortisation 10 10 11
Analyse and compare the summary cash flow statements of companies A, B and C. Cash flow from operating activities Capital expenditure Capital increase Dividends paid Decrease in net debt A B C -100 50 -50 -150 -30 250 250 -15 0 0 5 200
What is your view of Ringkvist AB? Ringkvist AB 2005 2006 2007 Cash flow from operating activities 400 700 1600 Capital expenditure 1000 1300 1400 Asset disposals 0 0 Capital increase 300 300 0 Dividends paid Decrease in net debt 100 200 -300 -400
What is your view of Moser srl? Moser srl 2005 2006 2007 Cash flow from operating activities 400 300 -200 Capital expenditure 1000 1100 300 Asset disposals 0 0 300 Capital increase 300 600 Dividends Decrease in net debt 0 0 -300 -800 400
What is your view of the liquidity of this company? 7-year fixed assets 200 Shareholders' equity 100 3-year fixed assets 200 5-year debts 200 3-month inventories 300 1-year debts 300 2-month receivables 100 1-month debts 400 1-day liquidities 200 Total 1000 Total 1000
Why is capital employed equal to invested capital?
What is the leverage effect?
How is the leverage effect calculated?
Why is the leverage effect equation an accounting tautology?
According to the leverage effect equation, for the same after-tax ROCE of 10%, an increase in debt (costing 4% after tax) could improve the return on equity. State your views.
Why is goodwill a problem when calculating ROCE?
What is the basic purpose of the leverage effect?
Your financial director suggests that you increase debt to increase ROE. State your views.
What is the main problem with accounting profitability indicators such as ROE or ROCE?
Over a given period, interest rates are low, corporation tax rates are high and the economy is doing well. What consequences will this have on the financial structure of companies?
Prove the leverage effect equation.
A businessman is hoping to get a 20% return on equity after tax. The business generates a 3% sales margin (after tax). Provide two possible combinations of financial structure, profitability and capital employed that could lead to the generation of a 20%return on equity (the cost of borrowing is 5%
Calculate the leverage effect for each year. What are your conclusions? Millions of Shareholders' equity Long- and medium-term debt Financial expense before tax Net income Tax rate 1 2 3 4 ST 5 100 115 320 300 240 123 180 540 640 680 11 18.5 29 63 83 14 16 (20) (60) (40) 35% 35% 35% 35% 35%
Calculate the ROCE and the ROE of Carlsberg. You will include retirement benefits in the net debt and other long term liabilities in working capital. There has been no amortisation or impairment of goodwill. Income tax rate in the Netherlands is 25.5%. m NET SALES 2006 % 41.08 - Cost of sales =
What are the four basic cycles of a company?
Why do we say that financial flows are the flip side of investment and operating flows?
Define operating cash flow. Should the company be able to spend this surplus as it likes?
Is operating cash flow an accounting profit?
Why do we say that as a general rule, operating cash flow should be positive? Provide a simple example that demonstrates that operating cash flow can be negative during periods of strong growth, startup periods and in the event of strong seasonal fluctuations.
When a cash flow budget is drawn up for the purposes of assessing an investment, can free cash flows be negative? If so, is it more likely that this will be the case at the beginning or at the end of the business plan period? Why?
Among the following different flows, which will be appropriated by both shareholders and lenders: operating receipts, operating cash flow, free cash flows? Who has priority, shareholders or lenders? Why?
A feature of a supermarket chain such as Tesco or Ahold is a very fast rotation of food stocks (six days), cash payments by customers, long supplier credit periods (60 days)and very low administrative costs. Will the operating cycle generate cash requirements or a cash surplus?
Should the cash outflows of launching a new perfume be considered as an operating outlay or an investment outlay?
How is an investment decision analysed from a cash standpoint?
After reading this chapter, can you guess how to define bankruptcy?
Is debt capital risk free for the lender? Can you analyse what the risk is? Why do some borrowers default on loans?
Boomwichers NV, a Dutch company financed by shareholders’ equity only, decides during the course of 2008 to finance an investment project worth BC200m using shareholders’ equity (50%) and debt (50%). The loan it takes out (BC100m) will be paid off in full in n + 5, and the company will pay 5%
Ellingham plc opens a Spanish subsidiary, which starts operating on 2 January 2005.On 2 January 2005 it has to buy a machine costing BC30m, partly financed by a BC20m bank loan repayable in instalments of BC2m every 15 July and 15 January over 5 years.Financial expenses, payable on a half-yearly
Should the unexpected announcement of a rise in interest rates automatically result in a drop in the stock market index?
Would your answer be the same if the announcement had been anticipated by the market? So what is the most important factor when valuing securities?
Other than the word “market”, what in your view is the key word in corporate finance?
How is it possible to sell something without actually having bought anything?
You are offered a loan at 7.5% over 10 years without guarantee, and a loan at 7% over 10 years with guarantee. You need the loan. How should you go about deciding which loan to take out?
Can you define a financial security?
Is a financial security a financial asset or a financial liability? Why?
Provide an example of something that was assumed to be a financial asset, but which proved on analysis to be a financial liability.
How important is it to think in terms of an offer of and a demand for securities, and not in terms of an offer of and a demand for capital, for:◦ shares;◦ bonds;◦ medium-term international loans;◦ domestic bank loans.Why?
What other financial term should immediately spring to mind when you hear the word“returns”?
In your view, are more securities issued on the primary market or exchanged on the secondary market?
What other financial term should immediately spring to mind when you hear the word “risk”?
Which instrument carries the greater risk – shares or bonds? Why?
Explain how the poor performance of the secondary market can impact the primary market.
What are the two biggest flaws of a bad financial manager?
Why do you believe management has to do some roadshows before issuing new shares or bonds?
In what condition can a bottle of wine be considered as a financial product?
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