Corporate Finance Questions and Calculations

The primary financial objective of corporate finance is to maximise the value of

the company for its shareholders. Identify three key strategic decisions that

financial managers need to make to create wealth for shareholders.

Tudo Ltd is a multinational company in the UK. The company produces and sells a product, flat irons. It considers a project that will cost £22 million and generate £2.5 million after-tax cash inflows at the end of the first year. The cash inflow will grow at a rate of 2 percent per year indefinitely. The company has a capital structure consisting of debt and common stock. It has a target debtequity ratio of 0.70 and after-tax cost of debt of 5.5 percent. The equity currently has a beta of 1.30, and the market risk premium is 7.5 percent. Annual risk-free rate is 4.5 percent. Evaluate the project and discuss whether Tudo Ltd should take on the project. Word Limit – 150 (excluding Calculation)

IRR and NPV methods can be applied to assess the viability of projects. Discuss whether there are any situations in which you might prefer one method over the other.

In a no tax world, Modigliani and Miller (MM) propositions I and II inherentlyn contradict each other. Explain whether the statement is true or false. Word Limit

Cannon Ltd is an international company in the UK. The company is a global provider of mobile phone and accessories. It expects its EBIT to be £320,000 every year forever. Cannon Ltd currently has no debt, and its cost of equity is 12.5 percent. The company can borrow at 10.5 percent. Assume the tax rate is 30 percent.

i. Cannon Ltd currently has no debt. Using M&M Proposition I with taxes, explain the implications for the firm’s capital structure decision.

ii. Calculate the value of the company if it borrows £220,000 and uses the proceeds to repurchase shares. Calculation, no words limit

There are various factors influencing the decision of a company’s capital structure. Critically discuss two real world factors that affect the debt to equity ratio of a company.

At Greenwich Development Ltd board meeting, a director of the company said that the use of dividend discount models by investors is “proof” that the higher the dividend, the higher the stock price. Explain how an increase in dividend payout would affect sustainable growth rate holding all other factors constant.

Aloe Ltd is an international company in the UK. The company has the net income of £210,000. It has 120,000 outstanding shares and a 100 percent payout policy. It is expected that the value of the firm one year from now is £4,800,500. The appropriate discount rate for Aloe Ltd is 12.5 percent, and the dividend tax rate is zero.

i. Calculate the current value of the company assuming the current dividen has not yet been paid. Calculation, no words limit

ii. Calculate the ex-dividend price of the Aloe Ltd’s stock if the board follows its current policy. Calculation, no words limit

iii. In a board meeting, several of the board members claimed that the low dividend is depressing the stock price. Comment on the claim using Modigliani and Miller (MM) propositions.

Discuss six characteristics of interest rate sensitivity of bonds.

b) A corporate bond has a 4.25 percent annual coupon rate and a £100 face value. Interest is paid annually, and the bond has 4 years to maturity. If investors require a 15 percent annual yield, calculate the price that you would like to pay for this bond. Calculation, no words limit

c) You would like to invest in Applesoh plc. You expect that Applesoh will produce dividends in three consecutive years of £0, £0.31, and £0.65, respectively. The dividend in year 4 is estimated to be £0.67 and should grow in perpetuity at 4 percent per annual. Assume that you require an annual rate of return of 10 percent. Calculate the price of the stock you would like to pay. Calculation, no words limit

d) Explain how the price earnings ratio of a stock will change if the required rate of return increases, assuming other factors are unchanged.

a)Calculate the expected return and standard deviation of returns on his portfolio. Calculation, no words limit

(ii) If the correlation coefficient were 0 or –0.6, how would this change your previous calculations in (i). Calculation, no words limit

(iii) Assess whether Jiaying’s portfolio is better or worse than one invested entirely in share X.

b) Describe three fundamental distinctions between forward and futures contract.