- You are presented with the following different views of stock market behaviour.
(1) If a company publishes an earnings figure that is better than the market...(Solved)
You are presented with the following different views of stock market behaviour.
(1) If a company publishes an earnings figure that is better than the market expects, the shares of that
company will usually experience an abnormally high return both on the day of the earnings
announcement and over the two or three days following the date of the announcement.
(2) The return on professionally managed portfolios of equities is likely to be no better than that which
` could be achieved by a naïve investor who holds the market portfolio.
(3) Share prices usually seem to rise sharply in the first few days of a new fiscal year. However, this can
be explained by the fact that many investors sell loosing stocks just before the fiscal year end in
order to establish a tax loss for Capital Gains Tax purposes. This causes abnormal downward
pressure which is released when the new fiscal year begins.
You are required:
(a) to describe the three forms of the Efficient Market Hypothesis;
(b) to discuss what each of the above three statements would tell you about the efficiency of the stock
market. Where appropriate relate your comments to one or more forms o f the Efficient Market Hypothesis.
Date posted: April 22, 2021. Answers (1)
- The annual reports of commercial corporations increasingly contain details of share option schemes.
You are required:
(a) To discuss whether share option schemes for either directors or...(Solved)
The annual reports of commercial corporations increasingly contain details of share option schemes.
You are required:
(a) To discuss whether share option schemes for either directors or employees generally, can benefit the
interest of the shareholders in the company;
( b) Contrast share option schemes with other schemes for relating managers' rewards to the financial
performance of the company;
(c) Describe the treatment of share option schemes in calculations of earnings per share.
Date posted: April 22, 2021. Answers (1)
- Describe the main types of foreign exchange rate system. Briefly discuss how such systems might affect the
ability of financial managers to forecast exchange rates.(Solved)
Describe the main types of foreign exchange rate system. Briefly discuss how such systems might affect the
ability of financial managers to forecast exchange rates.
Date posted: April 22, 2021. Answers (1)
- The following data relates to a large company operating in the electronics industry:
A major institutional shareholder has criticized the level of dividend payment of the...(Solved)
The following data relates to a large company operating in the electronics industry:
A major institutional shareholder has criticized the level of dividend payment of the company suggesting that it should be substantially increased.
Required:
(a) Briefly discuss the factors that are likely to influence the company's dividend policy, and
(b) Discuss whether or not the institutional shareholder's criticism is likely to be valid.
Date posted: April 22, 2021. Answers (1)
- Discuss the arguments for and against the introduction of statutory controls on corporate governance.(Solved)
Discuss the arguments for and against the introduction of statutory controls on corporate governance.
Date posted: April 22, 2021. Answers (1)
- The objective of financial management is to maximize the value of the firm.
You are required to discuss how the achievement of this objective might be...(Solved)
The objective of financial management is to maximize the value of the firm.
You are required to discuss how the achievement of this objective might be compromised by the conflicts which may arise between the various stakeholders in an organization.
Date posted: April 22, 2021. Answers (1)
- Fuelit plc is an electricity supplier in the UK. The company has historically generated the majority of its
electricity using a coal fueled power station, but...(Solved)
Fuelit plc is an electricity supplier in the UK. The company has historically generated the majority of its
electricity using a coal fueled power station, but as a result of the closure of many coal mines and
depleted coal resources, is now considering what type of new power station to invest in. The alternatives
are a gas fueled power station, or a new type of efficient nuclear power station.
Both types of power station are expected to generate annual revenues at current prices of Sh.800 million.
The expected operating life of both types of power station is 25 years.
Other information:
(i) Whichever power station is selected, electricity generation is scheduled to commence in three
years time.
(ii) If gas is used most of the workers at the existing coal fired station can be transferred to the new
power station. After tax redundancy costs are expected to total Sh.4 million in year four. If nuclear
power is selected fewer workers will be required and after tax redundancy costs will total Sh.36
million, also in year four.
(iii) Both projects would be financed by Euro-bond issues denominated in Euros. The gas powered
station would require a bond issue at 8.5% per year, the bond for the nuclear project would be
at 10% reflecting the impact on financial gearing of a larger bond issue.
(iv) Costs of building the new power stations would be payable in two equal installments in one and two
years time.
(v) The existing coal fired power station would need to be demolished at a cost of Sh.10 million in
three years time.
(vi) The company‟s equity beta is expected to be 0.7 if the gas station is chosen and 1.4 if
the nuclear station is chosen. Gearing (debt to equity plus debt) is expected to be 35% with gas
and 60% with nuclear fuel.
(vii) The risk free rate is 4.5% per year and the market return is 14% per year. Inflation is currently 3%
per year in the UK and an average of 5% per year in the member countries of the Euro bloc in
the European Union.
(viii) Corporate tax is at the rate of 30% payable in the same year that the liability arises.
(ix) Tax allowable depreciation is at the rte of 10% per year on a straight line basis.
(x) At the end of twenty-five years of operations the gas plant is expected to cost Sh.25 million
(after tax) to demolish and clean up the site. Costs of decommissioning the nuclear plant are
much less certain, and could be anything between Sh.500 million and Sh.1,000 million (after tax)
depending upon what form of disposal is available for nuclear waste.
Required:
(a) Estimate the expected NPV of EACH OF investment in a gas fueled power station and
investment in a nuclear fueled power station.
State clearly any assumptions that you make.
(NB: It is recommended that annuity tables are used wherever possible)
(b) Discuss other information that might assist the decision process.
Date posted: April 22, 2021. Answers (1)
- Excluding foreign exchange risks, discuss, with examples, how the risks of foreign trade might be managed.(Solved)
Excluding foreign exchange risks, discuss, with examples, how the risks of foreign trade might be managed.
Date posted: April 22, 2021. Answers (1)
- Justify and criticize the usual assumption made in financial management literature that the objective of a
company is to maximize the wealth of its shareholders. (Do...(Solved)
Justify and criticize the usual assumption made in financial management literature that the objective of a
company is to maximize the wealth of its shareholders. (Do not consider how this wealth is to be measured).
Date posted: April 21, 2021. Answers (1)
- Discuss how government actions can influence the tasks of the financial manager and explain how these actions can affect the attainment of financial objectives.(Solved)
Discuss how government actions can influence the tasks of the financial manager and explain how these actions can affect the attainment of financial objectives.
Date posted: April 21, 2021. Answers (1)
- Maltec plc is a company that has diversified into five different industries in five different countries. The investments are each approximately equal in value. The...(Solved)
Maltec plc is a company that has diversified into five different industries in five different countries. The investments are each approximately equal in value. The company's objective is to reduce risk
through diversification, and it believes that the return on any investment is not correlated with the return on any other investment. The estimated risk and return (in present value terms) of the five investments are shown below:
Required:
(a) Estimate the risk and return of the portfolio of five investments, and briefly explain the significance of your results.
(b) Discuss the validity to investors of Maltec's objective of risk reduction through international
diversification.
Date posted: April 21, 2021. Answers (1)
- Discuss the main features of:
(i) Corporate share repurchases (buy-backs); and
(ii) Share (stock) splits;
and why companies might use them. Include in your discussion comment on the...(Solved)
Discuss the main features of:
(i) Corporate share repurchases (buy-backs); and
(ii) Share (stock) splits;
and why companies might use them. Include in your discussion comment on the possible effects on share
price of share repurchases and share (stock) splits in comparison to the payment of dividends.
Date posted: April 21, 2021. Answers (1)
- The finance department of Beela Electronics has been criticized by the company's board of
directors for not undertaking an assessment of the political risk of the...(Solved)
The finance department of Beela Electronics has been criticized by the company's board of
directors for not undertaking an assessment of the political risk of the company's potential
direct investments in Africa. The board has received an interim report from a consultant that provides
an assessment of the factors affecting political risk in three African countries. The report assesses key variables on a scale of –10 to +10, with –10 the worst possible score and +10 the best.
The consultant suggests that economic growth and political stability are twice as important as the
other factors.
The consultant states in the report that previous clients have not invested in countries with a total weighted score of less than 30 out of a maximum possible 100 (with economic growth and political stability double weighted). The consultant therefore recommends that no investment in Africa should be undertaken.
Required:
(a) Discuss whether or not Beela electronics should use the technique suggested by the consultant in
order to decide whether or not to invest in Africa.
(b) Discuss briefly how Beela might manage political risk if it decides to invest in Africa.
Date posted: April 21, 2021. Answers (1)
- Give the reasons on why mergers and acquisitions should be undertaken to achieve corporate diversification
only.(Solved)
Give the reasons on why mergers and acquisitions should be undertaken to achieve corporate diversification
only.
Date posted: April 20, 2021. Answers (1)
- Outline the potential problems in the achievement of synergies.(Solved)
Outline the potential problems in the achievement of synergies.
Date posted: April 20, 2021. Answers (1)
- Explain the possible synergies that might occur in mergers and acquisitions.(Solved)
Explain the possible synergies that might occur in mergers and acquisitions.
Date posted: April 20, 2021. Answers (1)
- Assume that your company has invested in 100,000 shares of Unglow plc, a manufacturer of light bulbs. You are concerned about the recent volatility in...(Solved)
Assume that your company has invested in 100,000 shares of Unglow plc, a manufacturer of light bulbs. You are concerned about the recent volatility in Unglow's share price due to the unpredictable weather
in the United Kingdom. You wish to protect your company's investment from a possible fall in
Unglow's share price until winter in three months time, but do not wish to sell the shares at present. No dividends are due to be paid by Uniglow during the next three months.
Market data:
Uniglow's current share price: Sh.20
Call option exercise price: Sh.20
Time to expiry: 3 months
Interest rates (annual): 6%
Volatility of Uniglow's shares 50% (standard deviation per year)
Assume that option contracts are for the purchase or sale of units of 1,000 shares.
Required:
(i) Devise a delta hedge that is expected to protect the investment against changes in the share price
until winter. Delta may be estimated using N(d1).
(ii) Comment upon whether or not such a hedge is likely to be totally successful.
Date posted: April 20, 2021. Answers (1)
- Briefly discuss the meaning and importance of the terms 'delta', 'theta' and 'vega' (also known as
kappa or lamba) in option pricing.(Solved)
Briefly discuss the meaning and importance of the terms 'delta', 'theta' and 'vega' (also known as
kappa or lamba) in option pricing.
Date posted: April 20, 2021. Answers (1)
- The managers of Strayer plc are investigating a potential Sh.25 million investment. The investment would be a diversification away from existing mainstream activities and into...(Solved)
The managers of Strayer plc are investigating a potential Sh.25 million investment. The investment would be a diversification away from existing mainstream activities and into the printing industry. Sh.6 million of the investment would be financed by internal funds, Sh.10 million by a rights issue and Sh.9 million by long term loans. The investment is expected to generate pre-tax net cash flows of approximately Sh.5 million per year, for a period of ten years. The residual value at the end of year ten is forecast to be Sh.5 million after tax. As the investment is in an area that the government wishes to develop, a subsidized loan of Sh.4 million out of the total Sh.9 million is available. This will cost 2% below the company's normal cost of long-term debt finance, which is 8%.
Strayer's equity beta is 0.85, and its financial gearing is 60% equity, 40% debt by value. The average
equity beta in the printing industry is 1.2, and average gearing 50% equity, 50% debt by market value.
The risk free rate is 5.5% per annum and the market return 12% per annum.
Issue costs are estimated to be 1% for debt financing (excluding the subsidized loan), and 4% for
equity financing. These costs are not tax allowable.
The corporate tax rate is 30%.
Required:
(a) Estimate the Adjusted Present Value (APV) of the proposed investment.
(b) Comment upon the circumstances under which APV might be a better method of evaluating a
capital investment than Net Present Value (NPV).
Date posted: April 20, 2021. Answers (1)
- Summarized financial details of Jetter plc are shown below:
Reserves ...(Solved)
Summarized financial details of Jetter plc are shown below:
Reserves 122
12% debentures June 2006 71
243
The company's ordinary shares are currently trading at Sh.22.00, and the debentures at
Sh.105.50. The debenture is redeemable at its par value of Sh.100.
The company's equity beta is 1.25.
Jetter plc is considering investing in one of three projects. The company has Sh.50 million that is currently earning 5.8% in short-term money market deposits. Any surplus funds after the investment in one of the projects will continue to be invested in the money market.
The company has employed an external consultant to estimate risk/return data relevant to the three projects.
Required:
(a) Evaluate which project should be selected. Do not use information provided later in the question
requirements in your evaluation.
State clearly any assumptions that you make in all parts of this question.
(b) Estimate Jetter's cost of capital prior to undertaking the investment. Briefly discuss (do not
calculate) what effect the project selected in (a) is likely to have on Jetter's cost of capital.
The profitability index of 1.3 also relates to this part of the question.
(c) The consultant has suggested that beta estimates should be adjusted by using the formula: [(0.67 x
unadjusted beta) + 0.33] in any estimate of required returns.
Briefly discuss the reason for using an adjusted beta such as this:
Date posted: April 20, 2021. Answers (1)