Corporate Finance Flashcards
Calculate the present value of the following cash flow: $2,000 received for ten years, with the first flow occurring at time 2. Discount rate = 10%.
Calculate the present value of the following cash flow: $2,000 received for ten years, with the first flow occurring at time 2. Discount rate = 10%.
Answer: $11 172
A ‘normal‘ 10 year annuity is received in years 1 to 10. This one is received in years 2 to 11, which is like 1 to 11 but omitting year 1.
Times 1-11: discount factor 6,495
Less time 1. (0,909)
Times 2-11: 5,586
5,586 x 2000 = 11 172
Assume that Carmed plc expects credit sales of $18m in the next year and has budgeted production costs as follows:
Raw materials: $4 mil
Direct labour: $5 mil
Production overheads: $3 mil
Total production costs: $12 mil
Raw materials are in inventory for an average of 3 weeks and finished goods are in inventory for an average of 4 weeks. All raw materials are added at the beginning of the production cycle which takes 5 weeks and incurs labour costs and production overheads at a constant rate. Suppliers of raw materials allow 4 weeks credit whereas customers are given 12 weeks to pay. If production takes place evenly throughout the year, what is the total working capital requirement?
Assume that Carmed plc expects credit sales of $18m in the next year and has budgeted production costs as follows:
Raw materials: $4 mil
Direct labour: $5 mil
Production overheads: $3 mil
Total production costs: $12 mil
Raw materials are in inventory for an average of 3 weeks and finished goods are in inventory for an average of 4 weeks. All raw materials are added at the beginning of the production cycle which takes 5 weeks and incurs labour costs and production overheads at a constant rate. Suppliers of raw materials allow 4 weeks credit whereas customers are given 12 weeks to pay. If production takes place evenly throughout the year, what is the total working capital requirement?
CASH CONVERSION CYCLE = Inventory + Receivables - Payables = (3+5+4) + 12 - 4 = 20 weeks
Working capital required: $5 769 231
Give an example of:
- investment decision
- interaction with financing/dividends
- financing decision
- interaction with investing/dividends
- dividend decision
- interaction with financing/investing
Give an example of:
- investment decision: machinery, vehicles, non-current assets
- interaction with financing/dividends: where does the money come from? No dividend?
- financing decision: loans, shares, retained earnings?
- interaction with investing/dividends: enough return to cover cost? Reduce dividend?
- dividend decision: where does the money come from? Borrowing?
- interaction with financing/investing: financing needed? Reduce investment?
Which of the following are thought to be problems with using ratios to report on performance?
- Creative accounting
- They ask more questions than they answer
- Difference in accounting policies
- Financial position statement relates to one day only
A. None of them
B. 1 and 2
C. All of them
D. 3 and 4
Which of the following are thought to be problems with using ratios to report on performance?
- Creative accounting
- They ask more questions than they answer
- Difference in accounting policies
- Financial position statement relates to one day only
C. All of them
Give 3 examples of how accounting profits might be manipulated.
Give 3 examples of how accounting profits might be manipulated.
- Provisions such as provisions for depreciation or anticipated losses
- The capitalisation of various expenses such as development costs
- Adding overhead costs to inventory valuations
Which one of the following mutually exclusive projects should a company adopt if its target ROCE = 15%.
a. project 1 only
b. project 2 only
c. both projects
d. neither project
Which one of the following mutually exclusive projects should a company adopt if its target ROCE = 15%.
a. project 1 only
Both projects yield > 17.5%, so both acceptable, however they are mutually exclusive therefore only one can go ahead. Project 1 will boost overall ROCE more than Project 2. However, project 2 will make the company more profits.
A shareholder purchased 1,000 shares in SJG Co on 1 January at a market price of $2.50 per share. On 31 December the shares had an ex-div market value of $2.82 per share. The dividend paid during the period was $0.27 per share. What is the total shareholder return?
A shareholder purchased 1,000 shares in SJG Co on 1 January at a market price of $2.50 per share. On 31 December the shares had an ex-div market value of $2.82 per share. The dividend paid during the period was $0.27 per share. What is the total shareholder return?
Answer: 23.6%
It is made up of the capital gain and the dividend yield:
$0.32 ($2.82 - $2.50) + $0.27 = $0.59 as a percentage of $2.50 (purchase price)
= (0.59/2.50) x 100 = 23.6%
Capital markets are said to be strong form efficient IF?
Capital markets are said to be strong form efficient IF?
current share prices reflect all information, whether or not it is publicly available
Which of the following are likely to be relevant costs for investment appraisal?
- feasibility study cost
- building cost
- depreciation
- net sales income
- head office costs
- machinery cost
- machinery sale
Which of the following are likely to be relevant costs for investment appraisal?
- feasibility study cost NO
- building cost YES
- depreciation NO
- net sales income YES
- head office costs NO
- machinery cost YES
- machinery sale YES
A company is considering investing in 1 of 3 projects, the cash flows of which are predicted below. Based solely on the payback method, which should they undertake?
a. A
b. B
c. C
A company is considering investing in 1 of 3 projects, the cash flows of which are predicted below. Based solely on the payback method, which should they undertake?
b. B
A new machine will cost $50,000 and will produce net cash inflows of:
Year 1 $20,000
Year 2 $40,000
Year 3 $25,000
The machine can be sold for $10,000 at the end of the project.
Using the NPV method and a discount rate of 10%, is the project worthwhile?
A new machine will cost $50,000 and will produce net cash inflows of:
Year 1 $20,000
Year 2 $40,000
Year 3 $25,000
The machine can be sold for $10,000 at the end of the project.
Using the NPV method and a discount rate of 10%, is the project worthwhile?
Answer: because the NPV is positive the project is worthwhile and should be accepted. It should increase shareholder wealth
Rank the following from 1 to 5 where 1 represents the lowest risk and lowest cost and 5 represents the highest risk and highest cost.
A. Unsecured creditors
B. Preference shareholders
C. Oridnary shareholders
D. Creditors with a floating charge
E. Creditors with a fixed charge
Rank the following from 1 to 5 where 1 represents the lowest risk and lowest cost and 5 represents the highest risk and highest cost.
Answer: E, D, A, B, C
E. Creditors with a fixed charge
D. Creditors with a floating charge
A. Unsecured creditors
B. Preference shareholders
C. Oridnary shareholders
What are the 3 stakeholder groups?
What are the 3 stakeholder groups?
Internal: employees, directors, managers
Connected: shareholders, customers, suppliers
External: local communities, pressure groups, government
JCW Co is appraising an opportunity to invest in some new machinery that has the following cash flows:
Initial investment: 40 000 EUR
Net cash flows 5 years in advance: 12 000 USD per annum
Decommissioning costs after 5 years: 15 000 USD
At a cost of capital of 10% what is the net present value of this project to the nearest $100?
a. Positive $700
b. Negative $11,275
c. Negative $3,800
d. Positive $14,800
JCW Co is appraising an opportunity to invest in some new machinery that has the following cash flows:
Initial investment: 40 000 EUR
Net cash flows 5 years in advance: 12 000 USD per annum
Decommissioning costs after 5 years: 15 000 USD
At a cost of capital of 10% what is the net present value of this project to the nearest $100?
a. Positive $700
A cash outlay which occurs at the beginning of a time period is taken to occur at the end of the previous year. Therefore an inflow of $12,000 in advance for 5 years (ie starting now) is taken to occur in years 0, 1, 2, 3 and 4.
Initial outlay (year 0): 40 000
Cash inflow year 0: 12 000
Cash inflow year 1: 10 909,09
Cash inflow year 2: 9917,36
Cash inflow year 3: 9 015,78
Cash inflow year 4: 8 196,16
Decommissining (year 5): -9 313,82
Walter Wall Carpets made profits before tax in 20X8 of $9,320,000. Tax amounted to $2,800,000. The company’s share capital is as follows:
Ordinary shares (10,000,000 shares of $1): $10,000,000
8% preference shares: $ 2,000,000
Calculate earnings per share.
Walter Wall Carpets made profits before tax in 20X8 of $9,320,000. Tax amounted to $2,800,000. The company’s share capital is as follows:
Ordinary shares (10,000,000 shares of $1): $10,000,000
8% preference shares: $2,000,000
Calculate earnings per share.
Answer: $0,636
Profits before tax: $9,320,000
Less tax: $2,800,000
Profits after tax: $6,520,000
Less preference dividend (8% of $2,000,000): $160 000
Earnings attibutable to ordinary shareholders: $6,360,000
Number of ordinary shares: 10 000 000
EPS: $6,360,000 / 10 000 000 = 0,636
Corporate strategy is concerned with: ???
Corporate strategy is concerned with:
the overall purpose and scope of the organisation and how value will be ADDED to the different parts (business units) of the organisation
Briefly describe the ‘agency problem’.
Briefly describe the ‘agency problem’.
Answer: managers make decisions that are not consistent with the objective of shareholder wealth maximisation. It can also affect creditors (banks, suppliers, bondholders) and customers.
Calculate the present value of the following cash flow: $3,000 received for six years with the first flow occurring at time 4. Discount rate = 6%.
Calculate the present value of the following cash flow: $3,000 received for six years with the first flow occurring at time 4. Discount rate = 6%.
Answer: $ 12,387
A ‘normal ‘ 6 year annuity is received in years 1-6. This one is received in years 4-9 which is like 1-9 but omitting years 1-3.
Times 1-9: discount factor 6,802
Less times 1-3: (2,673)
Times 4-9: 4,129
4,129 x 3000 = 12 387
A company is considering investing in 1 of 3 projects, the cash flows of which are predicted below. Based on a cost of capital of 10%, which has the highest NPV?
a. A
b. B
c. C
A company is considering investing in 1 of 3 projects, the cash flows of which are predicted below. Based on a cost of capital of 10%, which has the highest NPV?
b. B
A company will receive $10,000 for 25 years. Discount rate = 15.5%. What is the present value of the cash flows?
a. $157
b. $62,760
c. $205,953
d. $250,000
A company will receive $10,000 for 25 years. Discount rate = 15.5%. What is the present value of the cash flows?
b. $62,760
