corporate finance management exam PDF

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FT Corporate Financial Management (357FIN) Name: Yoon Jaeyoung CU ID: 10232206

Question 1. (a) (i) Buy Year Purchase

0

1

2

-5,000,000

-150,000

400,000

240,000

-150,000

-150,000

30,000

30,000

30,000

280,000

620,000

290,000

Tax Effects Total CFs Discount Factor 8%

-5,000,000 1

-150,000 0.926

PV

-5,000,000

NPV

-3,915,710

4

500,000

C.A (Tax savings) maintenance cost

3

138,900

0.857 239,960

0.794 492,280

260,000

0.735 213,150

(ii) Lease Year

0

1

Lease payment

-2,000,000

2

0

DF @ 8%

1

PV

-2,000,000

0

NPV (Lease)

4

-2,000,000

-2,000,000

400,000

400,000

400,000

-1,600,000

-1,600,000

400,000

Tax effects Total CFs

3

0.926

0.857

0.794

-1852000

-1371200

-1270400

0.735 294000

-4,199,600

Buying! The costs are lower in buying. (iii) Add the benefits of the machine Year Purchase

0

-5,000,000

1

2

3

4

400,000

240,000

-150,000

-150,000

30,000

30,000

30,000

-150,000

280,000

120,000

290,000

12,000,000

12,000,000

12,000,000

-2,400,000

-2,400,000

-2,400,000

12,000,000

9,600,000

9,600,000

-2,400,000

-5,000,000

11,850,000

9,880,000

9,720,000

-2,110,000

1

0.870

0.756

0.658

0.572

-5000000

10309500

7469280

6395760

-1206920

C.A (Tax savings)

maintenance cost (-)

-150,000

Tax Effects Total CFs (costs)

-5,000,000

Contribution Tax payment(-) Total CFs (benefits) Final CFs Discount Factor 15% PV NPV (Buy)

260,000

17,967,620

This machine should be invested as NPV is positive. (b)

To obtain a investment gain(capital gain) . If the customer does not have sufficient funds to purchase the product at the same time, lease allows t the customer can use the product by lease payment alternatively.

Question 2. (a) Forward contract (payment) = £100,000/0.8951 = $111,719 (b) Leading (payment)

pay now = £100,000/0.8917= $112,145 Borrow = $112,145 x (1+0.015x3/12) = $112,566 (c)Money market hedge (payment) Amount of Deposit z x ( 1+ 0.032 x 3/12) = £100,000 z = £ 99,206 To convert USD to Euro at SPOT. £ 99,206 / 0.8917 =$111,255 USD Borrowed= $111,255 Total USD payment =$111,255 x (1+0.015x3/12)= $111,672 (d) The most cost-effective hedge is MMH as it has the lowest cost. (e) Forward Market Hedge The amount to be received or paid in the future is confirmed in advance, enabling stable fund management.The opportunity cost should be abandoned if the future exchange rate fluctuates glibly. Short-term exchange risk can be avoided through MMH.

Question 3. (a) i)

EOQ= √(2x$25.00x200,000/$0.20) =7071 units

EOQ (7071units) cost of ordering

200,000/7071x$25 $707.11 cost of holding 7071/2x$0.20 $707.1 cost of purchase 200000x$9 1,800,000 Total 1,801,414

ii) EOQ (7071units)

Bulk Discount ( units )

cost of ordering 200,000/7071x$25

200,000/20,000x$25

$707

$250

cost of holding 7071/2x$0.20

20,000/2x$0.60

$707

$6,000

cost of purchase 200000x$9

200,000x$9x(100%-3%)

$1,800,000

$1,746,000

Total $1,801,414

$1,752,250

Accept Bulk Discount as it is more cheaper. (b) Incremental Sales ($) Profitability 60% x 1,600,000

Thai Paddy’s ($) 960,000

Increase in bad-debts 20% x 1,600,000

(320,000)

Increase in Investment in AR 1,600,000 x 90/360 x 40%

160,000

x cost of financing

x 15%

(24,000)

Incremental profitability

616,000

The credit should be extended to the new customers. ! Question 5. (a) Cum-right share price = $20 Discounted share price = $18 1-for-3 rights issue = 1:3 1 shares x $18 = $18 3 shares x $20 = $60 Average share price = $78 / 4shares = $19.5 Therefore, TERP= $19.5 (b) 20x6

20x7

20x8

20x9

Earnings per share (cents)

120

135

145

163

Dividends per share (cents)

60

68

73

82

500

566.67

608.33

683.33

Share price (cents) = Dividends per share /12%

P/E ratio

4.17

4.20

4.20

4.19

= Share price / EPS

Average P/E ratio= 4.19 120cents x (1+g)^3 = 163cents g= 0.107 EPS for 20y0 = 163cents (1+0.107) = 180.44cents Expected share price = 4.19 x 180.44 = 756.04 (e)

The debt-to-equity ratio shows the company's current debt and capital status. When companies do not have an alternative to raising capital in the Covid-19 situation, they may implement 'free and paid-in capital reduction' as a last resort. It's eliminating shares by the percentage of capital reduction without paying them back (or at a lower price than the share price). A high corporate debt ratio means that the risk is high. Investors won't want to invest in high-risk financial instruments. Therefore, it is difficult for low-credit companies to raise capital in the financial market. Either you have collateral (asset) to replace credit or you need support from policy financing....