Business finance : theory and practice

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Suggested answers to review questions existing shareholder or to an outsider acceptable to the other shareholders. This means that it is unlikely that the would-be departing shareholder can obtain a fair value for the shares. 16.6 Ideally, dividend policy should be based partly on the position of the shareholders regarding matters such as need for a regular cash income and personal tax position. It is not practical to know the personal circumstances of all of the shareholders in the typical large business. With small businesses it is possible to know which dividend policy most shareholders would prefer, and, therefore, to tailor dividend policy to meet their needs. 473
Appendix 4 Suggested answers to selected problem questions (Answers to the remaining problems are to be found in the Solutions Manual that accompanies this text.) Chapter 2 2.1 Talco Ltd Let the benefits of continuing with the research project be positive. £ Sales proceeds 250,000 Material – saving on disposal cost 8,000 (see Note 2) Labour [2,000 × (£25 − £12)] (26,000) (see Note 3) Management (£10,000 − £8,000) (2,000) (see Note 4) Net benefit of completing the project £230,000 Thus the overwhelming benefit lies with continuing with the project. Notes 1 Costs already incurred, including the £200,000 incurred on the project and £40,000 for materials, are irrelevant to the present decision. What is not irrelevant, however, is the fact that the project has reached a stage where relatively little cost will bring it to completion. What it cost to bring it to that stage has no bearing on the present decision. 2 Talco will be £8,000 better off as a result of continuing with the project since it will not have to pay to dispose of the material. 3 Since it appears that the skilled labour will be employed at a cost of £25,000, irrespective of the present decision, this amount is irrelevant. The difference between completing the project and abandoning it is that in the latter case it can make and sell 2,000 units of a product, at a net benefit per product of £13 (that is, £25 − £12). 4 Abandoning the project will save £2,000, the difference between the salary and the redundancy payment. Chapter 3 3.1 Counterpoint plc There has been a marked downturn in performance as measured both by ROCE and by ROSF. The proportional reduction is rather greater for ROSF than it is for ROCE. This difference between the reduction in ROCE and ROSF could be consistent with the increase in gearing, in that, all other things being equal, higher gearing implies higher interest costs. The alteration in the gearing is, however, fairly small which may mean that there are other reasons for the difference between ROCE and ROSF. 474
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Business Finance Theory and Practic
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We work with leading authors to dev
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Pearson Education Limited Edinburgh
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Contents 3 Financial (accounting) s
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Contents 7.12 Arbitrage pricing mod
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Contents 12.6 Dividends: the eviden
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Guided tour of the book Objectives
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Supporting resources Visit www.pear
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Preface updated and expanded. Where
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PART 1 The business finance environ
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Chapter 1 • Introduction 1.1 The
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Chapter 1 • Introduction 1.3 The
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Chapter 1 • Introduction Since it
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Chapter 1 • Introduction Where di
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Chapter 1 • Introduction concerne
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Chapter 1 • Introduction Borrowin
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Chapter 1 • Introduction time is
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Chapter 1 • Introduction Private
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Chapter 2 • A framework for finan
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Chapter 3 • Financial statements
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Openmirrors.com Chapter 3 • Finan
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Chapter 4 Investment appraisal meth
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Net present value (most unlikely in
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Net present value Investment opport
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Net present value The process, show
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Internal rate of return Year Cash f
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Internal rate of return opportunity
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Internal rate of return However, no
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Payback period Continuing to assess
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Accounting (unadjusted) rate of ret
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Investment appraisal methods used i
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Further reading l Conclusions on PB
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Problems Calculate: (a) the net pre
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Problems 4.6 Cool Ltd’s main fina
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Chapter 5 Practical aspects of inve
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Cash flows or accounting flows? Inv
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Do cash flows really occur at year
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Taxation Forecasting cash flows Inv
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Taxation Having considered the basi
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An example of an investment apprais
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Capital rationing Example 5.6 A bus
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Capital rationing There is no mathe
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Replacement decisions Helpful but l
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Routines for use with investment pr
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Investment appraisal and strategic
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Value-based management Select strat
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Value-based management Corporation
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l l Value-based management Use capi
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Real options 5.13 Real options ‘
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Summary Capital rationing l l l l M
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Problems PROBLEMS Sample answers to
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Problems by 31 December 20X7. The c
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Problems Based on an estimated cons
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Chapter 6 Risk in investment apprai
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Sensitivity analysis Example 6.1 Gr
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Sensitivity analysis (6) Cost of ca
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Use of probabilities Clearly, these
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Use of probabilities Solution This
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Expected value Possible outcome NPV
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Systematic and specific risk If, ho
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Utility theory Figure 6.2 Utility o
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Attitudes to risk and expected valu
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Summary Summary Risk l Risk is of v
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Problems REVIEW QUESTIONS Suggested
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Problems Project Initial outlay NPV
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Problems Estimates of the various f
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Problems ‘ There are sets of mult
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The relevance of security prices Th
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Security investment and risk Exampl
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Portfolio theory portfolio. Further
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Portfolio theory Table 7.1 Risk and
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Portfolio theory Figure 7.4 The ris
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Portfolio theory Figure 7.6 The eff
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Portfolio theory tangential to r f
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Capital asset pricing model Beta: a
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CAPM: an example of beta estimation
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CAPM - what went wrong? CAPM has be
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Arbitrage pricing model point is se
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l Portfolio theory - where are we n
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Review questions l l Managers diver
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Appendix: Derivation of CAPM APPEND
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Appendix: Derivation of CAPM or E(r
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Chapter 8 Sources of long-term fina
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Ordinary (equity) capital Figure 8.
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Ordinary (equity) capital Young and
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Methods of raising additional equit
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Preference shares perspective, than
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Loan notes and debentures are issue
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Loan notes and debentures Methods o
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Loan notes and debentures The relat
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Asset-backed finance (securitisatio
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Leasing from the large first-year a
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Conclusions on long-term finance Br
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Summary l l Rights issue = issue to
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Review questions l This too is quit
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The London Stock Exchange The exist
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The London Stock Exchange When memb
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Capital market efficiency current s
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Tests of capital market efficiency
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Conclusions and implications would
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Conclusions and implications winner
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Further reading l The current price
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Cost of individual capital elements
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Weighted average cost of capital ta
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Weighted average cost of capital Th
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Practicality of using WACC as the d
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Openmirrors.com Summary figure is s
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Problems 10.6 Vocalise plc has rece
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Is debt finance as cheap as it seem
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Business risk and financial risk Ta
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The traditional view 11.4 The tradi
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The Modigliani and Miller view of g
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Other practical issues relating to
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l Evidence on gearing a shareholder
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Gearing and the cost of capital - c
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Pecking order theory Figure 11.5 Th
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Weighted average cost of capital re
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Summary Summary Capital (financial)
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Problems A board meeting has been s
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Appendix I: Proof of the MM cost of
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Appendix II: Proof of the MM cost o
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Modigliani and Miller on dividends
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The traditional view on dividends W
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l l l l Other factors raising an eq
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Other factors is interpreted advers
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l l l Dividends: the evidence a ten
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Dividends: the evidence attract ins
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Conclusions on dividends Agency Age
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Problems l l l l Debt finance - rel
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Problems It has been estimated that
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Appendix: Proof of the MM dividend
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PART 4 Integrated decisions There a
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Chapter 13 • Management of workin
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Chapter 14 • Corporate restructur
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Chapter 15 International aspects of
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Chapter 15 • International aspect
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