REVISION FOR GRADUATION EXAM

CORPORATE FINANCE

FINANCE EXAM STRUCTURE

• 30 MCQs x 1 mark = 30 marks• 3 Short Answer Questions (8+8+9) = 25 marks• 3 Calculation Problems x 15 marks = 45 marks

• CONTENTS: From 3 subjects:– Investment and Portfolio Management (Ms. Nga)– International Finance (Ms. Huong)– Corporate Finance (Ms. Phuong)

CORPORATE FINANCE• 10 MCQs x 1 mark = 10 marks• 1 Short Answer Questions x 8 marks = 8 marks• 1 Calculation Problems x 15 marks = 15 marks

OVERVIEW1. Capital Budgeting

2. Capital Structure

3. Dividend policy

• CAPM, Cost of Capital, Pricing Shares & Bonds, Mergers, Leasing

Theories to Review• 3 questions of Corporate Finance• 3 forms of businesses • 3 reasons why share price falls after an equity issue• 3 types of dividends • 3 types of dividend policies• 3 types of acquisitions• Capital Budgeting: NPV, IRR, ARR, PB, DPB, PI• Fixed cost vs. variable costs• Roles of underwriters• Systematic (beta) vs. Unsystematic risks• Bonds: call, put, convertible provisions• IPO, private placements, right issue

Calculations to Review 1. Share Pricing

• Constant Dividend Growth:– Required Rate of return = 25% – Current dividend per share = 20 cents, expected to grow at 4% per

annum forever. What is the share price?

• Non- constant Dividend Growth:– Required Rate of return = 25% – Current dividend per share = $5. – The dividend of this company has been growing at 6% per annum in

recent years, a rate expected to be maintained for a further 3 years. – It is then expected that the growth rate will decline to 3% per annum

and remain at that level forever. – What is the share price? (Not examinable)

Calculations to Review 2. Bond Pricing

• A 10% $1,000,000 government bond: – matures in 12 years’ time – pays interest annually– is currently selling for $1,000,000

• Requirements:– What is the current required yield? – What will be the price of the bond, given an immediate

decrease in the required yield to 8% per annum?– Assume that in the next year, the required yield will

increase to 11% per annum. What will be the price of the bond next year?

Calculations to Review 3. NPV

• Project A has the following cash flows:– Initial investment: -340,000– Year 1 = 60,000– Year 2 = 50,000– Year 3 = 90,000– Year 4 = 80,000– Year 5 = 70,000

• Discount rate = 12%

• Calculate NPV.

Calculations to Review 4. Payback Period

• Calculate the payback period of project A in the previous slide

5. Break-even• Assume that we can buy hats from a retail supplier

for $7 each. Also assume that we can buy hats from a wholesale supplier for $4 each. We have accounting expenses of $650, which are fixed in nature, and $310 as depreciation. How many hats do we have to sell to break-even?

Calculations to Review 6. Value of right

• Need Cash Limited currently has 1,200,000 ordinary shares on issue and their shares last traded on the Australian Stock Exchange (ASX) at $5.50. They made an announcement today to the ASX of a major expansion project costing $4,000,000, which they plan to finance using a non-renounceable rights issue of new ordinary shares. The company plans to price the rights offering at a lower subscription price of $5.00 per share.

1. Determine the number of new shares that the company will have to issue to raise the $4,000,000.

2. How many shares currently held will be required to buy one new share?3. Calculate the value of each right. 4. Calculate the expected share price on the ex-rights date. 5. Julia owned 60,000 shares in Need Cash Limited prior to the announcement

of the rights issue, and is concerned about the possible effects of the rights issue plan. Show Julia how the value of her share investment is unaffected if she participates in the above rights issue.

Calculations to Review 7. Flotation Costs

• Nimomax Co. Ltd has just gone public. Under the fixed commitment agreement, Nimomax received $2.50 for each of the 20 million shares sold. The initial offering price was $2.80 per share, and the share rose to $2.90 per share in the first few minutes of trading. Nimomax paid $240,000 in direct legal and other costs. Indirect costs were $170,000. What was the flotation cost as a percentage of funds raised?

Calculations to Review 8. Mergers

• Company A is analyzing the possible acquisition of Company B. Both firms have no debt. The forecast of Company A shows that the purchase would increase its annual total after- tax cash flow by $1,000,000 indefinitely. The current market value of B is $20 million, and that of A is $100 million. The appropriate discount rate for the incremental cash flows is 8%.

• Company A is trying to decide whether it should offer 16.5% of its shares or $23 million in cash to Company B.

• What is the cost of each alternative? • What is the NPV of each alternative? • Which alternative should company A choose? Why?

Calculations to Review 9. WACC and Flotation Cost

• Showerarm Corporation Pty Ltd manufactures luxury plumbing supplies. It is currently at its target debt/ equity ratio of 0.30. It is considering building a new $12 million manufacturing facility. This new plant is expected to generate after- tax cash flows of $1.8 million per year forever.

• There are two financing options:– A new issue of ordinary shares. The flotation costs of the new share

issue would be about 8% of the amount raised. The required return on the company’s new equity is 17%

– A new issue of 20-year notes. The flotation costs of the new debt would be 3% of the proceeds. The company can raise new debt at 10%.

• Should the company invest in the new plant? Assume a 30% tax rate.