Question 1 (20 marks)
“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. (20 marks)
Question 2 (20 marks) : BUS704 Corporate Finance Assignment
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 $116. There
are 5125 shares outstanding.
Ignore taxes and other transaction fees and charges in answering the
following questions.
REQUIRED
a. Evaluate the two alternatives [i) and ii)] in terms of the effect on the
price per share and on shareholder wealth. (6 marks)
b. What will be the effect on Mustang’s earnings per share EPS and the
price-earnings ratio under the two different scenarios [i) and ii)]? (3 marks)
c. In the real world, which of these two actions [i) and ii)] would you not
recommend? Why? (3 marks)
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d. Dividends and share repurchase must be important because investors
will value a share only for the cash payouts it is expected to provide.
Do you agree? Explain your answer (8 marks)
Question 3 (20 marks) : BUS704 Corporate Finance Assignment Help University of the Sunshine Coast.
Helena’s Health Foods
Earnings before interest ($) 18,000
Market value of debt ($) 60,000
kd (%) 5%
ke (%) 14%
Market value of equity ($) 110,000
Actual Total market value ($) 170,000
Equilibrium value 150,000
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. (10 marks)
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? (10 marks)
Question 4 (20 marks)
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?
Assume a face value of $1 million Australian, per contract. (4 marks)
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? Assume a face value of $100,000 per contract and $3,000 interest per half-year.
(4 marks)
Question 5 (20 marks)
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 (2 marks)
b. Calculate the ex-rights price and the amount of right per share. (2 marks)
Question 6 (20 marks)
a. Explain carefully, the effects of an increase in total debt levels, on
a company’s risk, control and intrinsic value. (12 marks)
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? (4 marks)
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