Case Scenario: Corporate Finance

Question 1: "One of the most important aspects to project evaluation is managerial flexibility."

Explain the meaning of "managerial flexibility" and assess its significance in relation to other factors that are also important to project evaluation.

Question 2: Mustang Ltd. Is evaluating an

i) extra dividend, and

ii) a share repurchase.

In either case, $13,325 would be spent.

Current earnings are $4.25 per share, and the share sells for $116. There are 5125 shares outstanding.

Ignore taxes and other transaction fees and charges in answering the following questions.

Required: a. Evaluate the two alternatives [i) and ii)] in terms of the effect on the price per share and on shareholder wealth.

b. What will be the effect on Mustang's earnings per share EPS and the price-earningsratio under the two different scenarios [i) and ii)]?

c. In the real world, which of these two actions [i) and ii)] would you not recommend? Why?

d. Dividends and share repurchase must be important because investors will value a share only for the cash payouts it is expected to provide. Do you agree? Explain your answer

Question 3:

                                                               Helena's Health Foods                                                              

A second company, La Salle Health Foods, has the same financial information as Helena's Health Foods, except that La Salle Health Foods has no debt and has an equilibrium value of $150,000 and a Cost of equity of 12%.

According to Modigliani and Miller, the total market value of the two companies should be the same irrespective of the methods used to finance their investments.

Required: a. Suppose you hold 1.5% of the shares Helena's Health Foods. Show the process and the amount by which you could increase your income without increasing your risk.

b. What are the potential advantages and disadvantages to a company's owners if the company decreases the proportion of debt in its capital structure?

Question 4: a. On 30 September 20XX, the quoted price on the December 20XX 90-day bank bill futures contract was 94.78. Connor believed that interest rates would rise over the next month. Suppose that he committed to five contracts on 30 September 20XX and closed out his position on 31 October 20XX at a price of 96.42. Ignoring transaction costs, how much has Connor made or lost?

b. On 10 October 20XX, the December 20XX 10-year bond futures contract was priced at 96.485. Milly believed that interest rates would fall. Suppose that she took possession of two contracts on 10 October and closed out her position on 12 October at a price of 97.890. Ignoring transaction costs, how much has Milly made or lost?

c. On 30 September 20XX, the December 20XX SPI 200 futures contract was priced at 5446.0. Michelle believed that the share market was likely to rise over the next month. Suppose that she committed to seven contracts on 30 September and closed out her positon on 31 October at a price of 5589.0. Ignoring transaction costs, how much has Michelle made or lost?

d. Explain the key determinants of futures prices and argue whether the existence of ‘imperfect convergence' means that the futures market is providing an arbitrage opportunity.

Question 5: Byron Ltd. shares are trading at $12 each. Its directors have announced a 1-for-5 rights issue with a subscription price of $11.20 per share.

Required: a. Calculate the theoretical value of a right to one new share

b. Calculate the ex-rights price and the amount of right per share.

c. In theory, what is the maximum possible subscription price?

d. In theory, what is the minimum possible subscription price?

e. From the company's perspective what are the advantages and disadvantages of a right's issue; and when, if ever, may it cause the value of the company to increase?

Question 6: a. Explain carefully, the effects of an increase in total debt levels, on a company's risk, control and intrinsic value.

b. An investor buys a 90-day bank bill priced at a yield of 13.25% per annum and sells it ten days later priced at a yield of 12.55% per annum. What effective annual interest rate has the investor earned?

c. What are the main differences between short-term and long-term debt securities?