BCO315 Corporate Finance

BCO315 Corporate Finance Task brief & rubrics

Task: Re-sit Assignment

This task assesses the following learning outcomes:

· Demonstrate an understanding of financing a firm and its capital structure.

· Describe and analyze the trade-off between paying dividends and retaining the profits within the company.

· Evaluate a firm going from private to a public company.

· Discuss and analyze the benefits of leasing versus ownership of assets.

· Analyze the concepts underlying the firm’s cost of capital.

· Demonstrate an understanding of the theory and practices of mergers and acquisitions.

This assignment includes 10 questions (each question stands for 10% of total grade).

Each answer requires either written paragraph or detailed solution with formulas, explanations and computations.

Submission file format: Word document with all the answers, clearly identifying each question separately.

Weight: Resit – worth 100% of the overall grade – Please remember resits are capped at 70%

 

Task:

1. Discuss the views about relevance of dividend policy. What are the factors influencing dividend policy?

2. Justify the benefits of Initial Public Offering (IPO).

3. Explain how to achieve Optimal Capital Structure.

4. The stock of a company will go ex-dividend tomorrow. The dividend will be €0.50 per share, and there are 20,000 shares of stock outstanding. The market-value balance sheet items are the following:

Cash €100,000

Fixed assets €900,000

Equity €1,000,000

What price is the stock selling for today? What price will it sell for tomorrow? What impact will cash dividend have on the balance sheet? Ignore taxes.

5. A company has regularly paid a quarterly dividend of €0.50 per share on its 20,000 outstanding shares. Now suppose that it announces that instead of paying this dividend, it plans to repurchase €10,000 worth of stock instead. What effect will the repurchase have on an investor who currently holds 100 shares and sells 1 of those shares back to the company in the repurchase?

6. How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at €40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays €600,000 in legal fees.

7. An IPO was offered to the public at €18 a share with the issuing firm receiving €16.50 of that amount. The issuer incurred €750,000 in legal and administrative costs. At the end of the first trading day, the stock was priced at €22.40 a share. What was the total cost, including both direct and indirect costs, of issuing the securities if 225,000 shares were offered?

8. A firm is financed 60% with equity and 40% with debt. Currently, its debt has a pretax interest rate of 12%. Its common stock trades at €15.00 per share and its most recent dividend was €1.00. Future dividends are expected grow by 4%. If the tax rate is 34%, what is the firm's WACC?

9. Your firm is considering leasing a machine. The lease lasts for 3 years. The lease calls for 4 payments if €1,000 per year with the first payment occurring at lease inception. The machine would cost €3,600 to buy and would be straight-line depreciated to zero salvage value over 3-years. The firm can borrow at 6%, and the corporate tax rate is 30%. What is the NPV of the lease?

10. Consider the following information for two all-equity firms, Firm A and Firm B:

Firm A Firm B

Shares outstanding 2,400 7,200

Price per share €48 €36

Firm A estimates that the value of the synergistic benefit from acquiring Firm B is €7,020. Firm B has indicated that it would accept a cash purchase offer of €42 per share. Should Firm A proceed? (Find NPV of a merger)