Corporate Finance

Question 1

How is Country Risk Premium calculated and how is it integrated into the CAPM WACC model?

Answer 1

CRP = Sovereign yield spread*(annualized std dev of equity index in developing country/annualized std dev of sovereign bond market in terms of the developed market currency)

Added to the cost of equity.

Question 2

What is a flotation cost.

Answer 2

Refers to the fee charged by investment bankers to assist a company in raising new capital.

Question 3

How is breakeven computed?

Answer 3

PQ = VQ + F + C

Q = F + C / P - V

Q = F / P - V

P = Price per unit
Q= number of units produced and sold
V = Variable cost per unit
F = fixed operating cost
C = fixed financial cost

Question 4

What are the two types of bankruptcy protection available in the United States?

Answer 4

Chapter 11 - Reorganization

Chapter 8 - Liquidation

Question 5

What are the four arguments for share repos

Answer 5

They send a signal that mgmt believes that the Company’s stock is undervalued.

They offer the Company flexibility in its cash distributions

Tax advantages

Can be used to limit the increase in the number of shares outstanding when a significant employee stock options have been exercised.

Question 6

How are shares repurchased in a Dutch Auction?

Answer 6

Under a Dutch Auction, the company specifies a range of acceptable prices. Shareholders who are interested in selling their shares specify their selling price and the number of shares that they would want to sell.

Question 7

How is an operating cycle calculated?

Answer 7

DIO + DSO

Question 8

How is the cash conversion cycle or the net operating cycle calculated?

Answer 8

DIO + DSO + DPO