Final Term Fin 622

8/6/2019 Final Term Fin 622

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FINAL TERM EXAMINATIONSpring 2010

Afaaq_tariq@yahoo,.comFIN622- Corporate Finance (Session - 1)

Asslam O Alikum

FIN622- Corporate Finance (Session - 1) FINAL TERMEXAMINATION (Spring 2010)100% correct solved withreference included objective By Muhammad Afaaq, Faiza Aroob,Hira ali and Dua-e-ZainbRemember Us In Your Prayers

Best regardsMuhammad Afaaq

Mba 3 rd Finance Group

[email protected]

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Question No: 1 ( Marks: 1 ) - Please choose oneWhich of the following statements is TRUE regarding ProfitabilityIndex? It ignores time value of money It ignores future cash flows It ignores the scale of investmentPAGE #36Disadvantage of PI:Like IRR it is a percentage and therefore ignores the scale ofinvestment.

It ignores return on investment

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Question No: 2 ( Marks: 1 ) - Please choose one


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Which of the following is a tool that identifies the strengths,weaknesses, opportunities and threats of an organization? SWOT AnalysisPAGE # 1SWOT stands for:

Strengths Weaknesses Opportunities Threats

Trend Analysis Fundamental Analysis Technical AnalysisQuestion No: 3 ( Marks: 1 ) - Please choose oneIf sensitivity analysis concludes that the largest impact on profitswould come from changes in the sales level, then which of thefollowing recommendations should be considered? Fixed costs should be traded for variable costs Variable costs should be traded for fixed costs. The project should not be undertaken. Additional marketing analysis may be beneficial beforeproceeding.last McQ on following linkhttp://www1.shift.edu.cn/jrxy/jpkc/html/quizzes/Chpt07.htm?As25=1

For further see bellow linkhttp://www.investopedia.com/terms/s/sensitivityanalysis.asp

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Question No: 4 ( Marks: 1 ) - Please choose oneThe employment of fixed costs associated with the actual productionof goods or services is known as: Financial leverage

Volume discounting Operating leverage CovarianceQuestion No: 5 ( Marks: 1 ) - Please choose oneWhich one of the following terms refers to the variability of return onstocks or portfolios, associated with changes in return on the marketas a whole?
http://www1.shift.edu.cn/jrxy/jpkc/html/quizzes/Chpt07.htm?As25=1http://www1.shift.edu.cn/jrxy/jpkc/html/quizzes/Chpt07.htm?As25=1http://www.investopedia.com/terms/s/sensitivityanalysis.asphttp://www1.shift.edu.cn/jrxy/jpkc/html/quizzes/Chpt07.htm?As25=1http://www.investopedia.com/terms/s/sensitivityanalysis.asp


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Unsystematic risk Unique risk Systematic risk

Slide # 38 on following link

http://www.slideshare.net/ami_goel/risk-and-return-943136

Company specific risk

Question No: 6 ( Marks: 1 ) - Please choose oneWhat will be the taxable income of an Un-levered firm, if it hasEarning Before Interest and Tax (EBIT) equal to Rs.50,000, and its taxrate is 35%? Rs.25,000 Rs.45,000 Rs.50, 000Earnings before Taxes (EBT) = Taxable Income = AccountingIncome (Economic Income)http://www.turkelektrik.com/yon-Mali-Unlevered.htm

Rs.60,000Question No: 7 ( Marks: 1 ) - Please choose oneWhich of the following statements is TRUE regarding temporary

working capital?
http://www.slideshare.net/ami_goel/risk-and-return-943136http://www.slideshare.net/ami_goel/risk-and-return-943136http://www.turkelektrik.com/yon-Mali-Unlevered.htmhttp://www.slideshare.net/ami_goel/risk-and-return-943136http://www.turkelektrik.com/yon-Mali-Unlevered.htm


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Temporary working capital varies with seasonalrequirements.

PAGE 90Temporary working capital is the amount of investment in

current assets that varies according to the seasonalrequirements.ORTemporary Working capital

The temporary or varying working capital varies with the volumeof operations. It fluctuates with the scale of operations. This is theadditional working capital required from time to time over and abovethe permanent or fixed working capital. During seasons, moreproduction/sales take place resulting in larger working capitalneeds. The reverse is true during off-seasons. As seasons vary,temporary working capital requirement moves up and down.Temporary working capital can be financed through short term fundslike current liabilities. When the level of temporary working capitalmoves up, the business might use short-term funds and when thelevel for temporary working capital recedes, the business may retire itsshort-term loansORhttp://www.tutorsonnet.com/homework_help/working_capital_management/permanent_and_temporary_working_capital_online_tutoring.htm

Temporary working capital is the constant component ofworking capital.

Temporary working capital excludes inventories. Temporary working capital should be financed with bonds or

common stockQuestion No: 8 ( Marks: 1 ) - Please choose oneWhich of the following describes the hedging approach to financing? Maturity dates of financing instruments are spread over aperiod of time so that they mature in a steady, predictable fashion.

Each asset is offset with a financing instrument of thesame approximate maturity.Slide#17 of following linkhttp://wps.pearsoned.co.uk/wps/media/objects/1669/1709919/0273685988_ch08.ppt Each asset is offset with a put or call option.

The firm takes out insurance to protect itself against unevencash flows.
http://www.tutorsonnet.com/homework_help/working_capital_management/permanent_and_temporary_working_capital_online_tutoring.htmhttp://www.tutorsonnet.com/homework_help/working_capital_management/permanent_and_temporary_working_capital_online_tutoring.htmhttp://www.tutorsonnet.com/homework_help/working_capital_management/permanent_and_temporary_working_capital_online_tutoring.htmhttps://docs.google.com/viewer?url=http%3A%2F%2Fwps.pearsoned.co.uk%2Fwps%2Fmedia%2Fobjects%2F1669%2F1709919%2F0273685988_ch08.ppthttps://docs.google.com/viewer?url=http%3A%2F%2Fwps.pearsoned.co.uk%2Fwps%2Fmedia%2Fobjects%2F1669%2F1709919%2F0273685988_ch08.ppthttp://www.tutorsonnet.com/homework_help/working_capital_management/permanent_and_temporary_working_capital_online_tutoring.htmhttp://www.tutorsonnet.com/homework_help/working_capital_management/permanent_and_temporary_working_capital_online_tutoring.htmhttp://www.tutorsonnet.com/homework_help/working_capital_management/permanent_and_temporary_working_capital_online_tutoring.htmhttps://docs.google.com/viewer?url=http%3A%2F%2Fwps.pearsoned.co.uk%2Fwps%2Fmedia%2Fobjects%2F1669%2F1709919%2F0273685988_ch08.ppthttps://docs.google.com/viewer?url=http%3A%2F%2Fwps.pearsoned.co.uk%2Fwps%2Fmedia%2Fobjects%2F1669%2F1709919%2F0273685988_ch08.ppt


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According to the Miller Model, upper limit for cash balance is equal towhich of the following? Lower limit + Spreadhttp://www.themanagementor.com/enlightenmentorareas/finance/cfa/miller.htmUpper Limit = Lower Limit + 3Z Spread Lower limit Optimal limit + Lower limit Lower limit SpreadQuestion No: 10 ( Marks: 1 ) - Please choose oneSuppose that the sale (usage rate) on an item gets doubled. The EOQ(Economic Order Quantity) for that item should be: Halved Unaffected Decreased IncreasedQuestion No: 11 ( Marks: 1 ) - Please choose oneA firm wants to acquire another firm by purchasing its assets. Whichof the following methods firm can use to evaluate the financial aspects

of this deal? Replacement cost methodPAGE # 118Replacement cost, where you evaluate what it would cost you toreplace all of the assets that a firm has today.

Dividend valuation method Present value method Price earning ratio method

Question No: 12 ( Marks: 1 ) - Please choose oneIn which of the following acquisition strategies, a purchaser hascomplete knowledge of the acquiring firm? Management Buy-In Management buyoutPAGE # 123Management Buyouts


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Management buyouts are similar in all major legal aspects to any otheracquisition of a company. The particular nature of the MBO lies in theposition of the buyers as managers of the company and the practicalconsequences that follow from that. In particular, the due diligenceprocess is likely to be limited as the buyers already have full

knowledge of the company available to them. The seller is alsounlikely to give any but the most basic warranties to the management,on the basis that the management knows more about thecompany than the sellers do and the Reference ore the sellers shouldnot have to warrant the state of the company. In many cases, thecompany will already be a private company, but if it is public then themanagement will take it private. Consolidation Amalgamation

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Question No: 13 ( Marks: 1 ) - Please choose oneWhich one of the following statements is CORRECT regarding exerciseprice? Exercise price is the price mentioned in the option atwhich the holder exercises his rightPAGE # 139Strike or exercise price:The price mentioned in option at which the holder exercises his right is

known as exercise or strike price.

Exercise price is the price mentioned in the option at which theholder exercises his obligation Exercise price is the price mentioned in the option at which theoption seller exercises his right Exercise price is the price mentioned in the option at which theoption writer exercises his right


Which one of the following statements is CORRECT regarding OptionsContacts? A put option gives the holder a right to sell underlyingitem at a specified pricePAGE # 139Put option gives its holder a right (not obligation) to sellunderlying item at specified price.


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A put option gives its writer the right to sell underlying item ata specified price A call option gives its writer a right to sell underlying item A call option gives its holder a right to sell underlying item

Question No: 15 ( Marks: 1 ) - Please choose oneIf market interest rate increases above the agreed rate in an interestrate option, the effective interest rate for the option holder would be: Less than the market ratePAGE # 143Interest Expense: by the loan amount. This effective interest rate isless than the rate prevailing in the market.

Greater than market rate Equal to the market rate ZeroQuestion No: 16 ( Marks: 1 ) - Please choose oneWhich one of the following techniques can reduce the risks anddisadvantages of share purchase method in mergers and acquisitions? Spin-off Hive-downPAGE # 114There is a technique called hive down which can reduce the risks anddisadvantages of share purchase method.

Hubris Off-shootQuestion No: 17 ( Marks: 1 ) - Please choose oneThe financial consideration to be paid to target company in mergerscan be classified in to the following categories EXCEPT: Cash Assets

PAGE # 114The financial consideration to be paid to target company in mergerscan be classified in to following categories:

Cash Share ordinary or preferences Debt

Share ordinary or preference Debt


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Question No: 18 ( Marks: 1 ) - Please choose oneWhich of the following types of dividend policies results in the most

volatile dividend payments and stockholder discomfort? Target dividend-payout policy Low-regular-and-extra dividend policy Regular dividend policy Constant payout-ratio dividend policyPAGE # 74Constant dividend payout (div per share/Eps)

A fixed %age is paid out as dividend. Under this policy the dividendamount will vary because the net income is not constant. Thusresults in variability of return to investors. The dividends may dropto nil in case of loss. Market price of share will lower.Same MCQ on web see below linkhttp://wps.aw.com/aw_gitman_pmf_12/85/21795/5579564.cw/content/index.html

Question No: 19 ( Marks: 1 ) - Please choose oneSuppose you invested Rs. 8,000 in a savings account paying 5 percentinterest a year, compounded annually. How much amount your

account will have at the end the end of four years? Rs.10,208 Rs.9,728Page#13To determine future value when interest is compounded:

Where PVis the present value, n is the number of compoundingperiods, andIstands for the interest rate per period.Solution:Fv=PV(1+i)^n

Fv=8000(1+5%)^4Fv=8000(1+0.05)^4Fv=8000(1.05)^4Fv=8000*1.2155Fv=9724.05So answer is Rs.9,728

Rs.10,880
http://wps.aw.com/aw_gitman_pmf_12/85/21795/5579564.cw/content/index.htmlhttp://wps.aw.com/aw_gitman_pmf_12/85/21795/5579564.cw/content/index.htmlhttp://wps.aw.com/aw_gitman_pmf_12/85/21795/5579564.cw/content/index.htmlhttp://wps.aw.com/aw_gitman_pmf_12/85/21795/5579564.cw/content/index.html


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Rs.9,624

Question No: 20 ( Marks: 1 ) - Please choose oneIf you deposit Rs. 12,000 per year for 16 years (each deposit is madeat the beginning of each year) in an account that pays an annual

interest rate of 15%, what will your account be worth at the end of 16years? Rs. 82,168.44 Rs. 71,450.82 Rs. 768,901.12 Rs. 668,609.67

Financial management (MGT201)Page # 35 Future value of annuity =constant cash flows x(1+i)^n -1/i

= 12000(1+0.15)^16 -1/0.15= 668,609.6699

So answer is 668,609.67

FVA = PMT[(1+I)n-1/i]= 12000[(1+.15)16-1/.15]= 668,609.67

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Question No: 21 ( Marks: 1 ) - Please choose oneWhich of the following statements would be CORRECT regardingnominal interest rate when inflations is expected to occur over theforeseeable future? Nonimal interest rate would be equal to real interest rate Nonimal interest rate would be more than real interestratePage #20If inflation in the economy has been 10% in the year, then the$110 in the account at the end of the year buys the same

amount as the $100 did a year ago. The real interest rate, inthis case, is zero.

Nonimal interest rate would be half of real interest rate Nonimal interest rate would be less than the real interest rate



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Which of the following is a method of evaluating securities byanalyzing statistics generated by market activity, such as past pricesand volume? Technical analysishttp://www.investopedia.com/terms/t/technicalanalysis.asp

A method of evaluating securities by analyzing statistics generated bymarket activity, such as past prices and volume. Technical analysts donot attempt to measure a security's intrinsic value, but instead usecharts and other tools to identify patterns that can suggest futureactivity

Fundamental analysis Common size analysis Ratio analysisQuestion No: 23 ( Marks: 1 ) - Please choose oneWhich of the following statements best describes the term MarketCorrection? Market Correction refers to the situation whereequilibrium of supply & demand of shares occurs in the marketIt is about the A drop in the price of a security when that security hasbeen overbought and therefore overpriced. Market corrections areusually short-term and are necessary for the stability of the security.

Market correction refers to the situation where shares intrinsicvalues becomes equal to face values

Market Correction refers to the situation when there is a boomin the economy Market Correction refers to the situation where inflation rate isabove the market interest rateQuestion No: 24 ( Marks: 1 ) - Please choose oneWhich of the following statements is CORRECT regarding thefundamental analysis? Fundamental analysts use only Economic indicators toevaluate a stock

Fundamental analysts use only financial information to evaluatea companys stocks Fundamental analysts use financial and non-financialinformation to evaluate a companys stocksPAGE # 24fundamental information that is analyzed can include acompany's financial reports, and non-financial information such asestimates of the growth of demand for competing products, industry
http://www.investopedia.com/terms/t/technicalanalysis.asphttp://www.investopedia.com/terms/t/technicalanalysis.asp


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comparisons, analysis of the effects of new regulations or demographicchanges, and economy-wide changes.

Fundamental analysts use only non-financial information toevaluate a companys stocks

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Question No: 25 ( Marks: 1 ) - Please choose oneWhich of the following could be used to calculate the cost of commonequity? Interpolation method Dividend discount model YTM (Yield-to-Maturity) method Capital structure valuationQuestion No: 26 ( Marks: 1 ) - Please choose oneWhen faced with mutually exclusive options, which project should beaccepted under the 'Payback Method'? The one with the longest payback period The one with the shortest Payback periodPage #34When deciding between two or more competing projects, the usualdecision is to accept the one with the shortest payback.

It doesnt matter because the payback method is nottheoretically correct None of the given options

Question No: 27 ( Marks: 1 ) - Please choose oneWhich of the following IAS (International Accounting Standard) dealswith cash flow statement? IAS 1

IAS 7PAGE # 82Cash Flow StatementThis statement is governed by international accounting standard # 7

IAS 16 IAS 2


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Mr. Joseph Steve has changed the working capital policy of hiscompany recently. As a result, the liquidity for the company hasdecreased but an increase in profitability has been observed alongside.From this information we can conclude that the company must havechanged his working capital policy from ________ to ________. Conservative; AggressivePAGE # 89See table

Aggressive; Moderate Aggressive; Conservative None of the given options

Question No: 29 ( Marks: 1 ) - Please choose oneThe firm has very little net working capital sometimes even negativenet working capital that can be very risky. The above statementbelongs to: Aggressive working capital policy


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PAGE # 88 The firm has very little net working capital. It is more risky. May be a negative net working capital. It is very risky Conservative working capital policy Moderate working capital policy

The statement is not related to any of the working capitalpolicies

Question No: 30 ( Marks: 1 ) - Please choose oneThe amount of current assets that varies with seasonal requirementsis referred to as __________ working capital. Permanent Net

TemporaryPAGE 90Temporary working capital is the amount of investment incurrent assets that varies according to the seasonalrequirements.

Gross

Question No: 31 ( Marks: 1 ) - Please choose oneUnder which of the following concepts, each asset is offset with afinancing instrument of the same maturity? M&M proposition Clientele effect Hedging approachPAGE # 90Current Assets Financing Hedging ApproachUnder this approach each asset would be offset with a financing

instrument of the same maturity.

Baumol Model

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Question No: 32 ( Marks: 1 ) - Please choose oneWhich of the following is NOT one of the common motives of holdingcash? Personal Motives

PAGE # 94Motives for Cash holdingTransactions Motive ensures that the firm has enough funds totransact its routine, day-to-day business affairs. SafetyMotive protects the firm against being unable to meet unexpecteddemands for cash. Speculative Motive allows the firm to takeadvantage of unexpected opportunities that may arise

Safety Motives Transactions Motives

Speculative MotivesQuestion No: 33 ( Marks: 1 ) - Please choose oneWhich of the following is equal to Stock out cost? Carrying cost Safety stock Holding cost Carrying cost Reordering cost Safety stockReference: PAGE # 100Doubt in answer for further confirmation

Carrying cost Reordering cost

Question No: 34 ( Marks: 1 ) - Please choose oneWhich of the following statement is INCORRECT regarding Just-In-Time (JIT)? The inventories are kept near zero level. The inventory is acquired in such quantity on daily basis thatcan support the daily production level. The entire inventory acquired move to the production hall. Inventory level is necessarily kept at zero level.PAGE # 100

JIT does not necessarily mean zero inventory level.

Question No: 35 ( Marks: 1 ) - Please choose oneWhich of the following term refers to the minimum inventory amountneeded for an item? Stock-out Buffer Stock Holding Stock


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Safety StockPAGE # 100Safety stock is the minimum inventory amount needed for an item,based on anticipated usage and expected delivery time of materials

Question No: 36 ( Marks: 1 ) - Please choose oneWhich of the following is NOT an objective of Just-In-Time (JIT)? To increase the productivity To increase the inventoriesPAGE # 100Just In Time (JIT):The idea explains that inventories are kept near zero level. This meansthat inventory is acquired in such quantity on daily basis that cansupport the daily production level. The Reference ore, theres noinventory lying in store room rather all the inventory acquired move to

production hall. The philosophy is to pull inventory through theproduction processes on as as-needed basis rather than pushinginventory through the processes on an as-produces basis. Thisrequires extreme accurate estimates and there no chance of an error.For example, theres a high probability of running out of stock and thatcould be disastrous. JIT does not necessarily mean zero inventorylevel. The objective is to minimize the inventories but to increase theproductivity, quality and flexibility.

To increase the quality To increase the flexibility


Question No: 37 ( Marks: 1 ) - Please choose oneIf the people are not able to work together, the merger will notsucceed. Which of the following cause(s) of failure is(are) beingdepicted in this statement? Lack of planning Corporate culture

PAGE # 111Corporate culture:Even if two companies seem to have all the right ingredients in placefor a successful merger, cultural differences can break the deal. It isnot enough for two companies to appear to fit well on paper; at theend of the day, if the people are not able to work together, themerger will not succeed


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Talent departure All of the given optionsQuestion No: 38 ( Marks: 1 ) - Please choose oneWhich of the following is an anti takeover strategy in which the target

company make significant efforts to resist a takeover bid e.g. by amajor acquisition, issue new shares? Shark repellent Pac-man Poison pill Political pressurePAGE # 120Politics:Political pressure is an effective anti-take over tool. Two goodexamples will make you understand better how a government can stoptakeover bid.Question No: 39 ( Marks: 1 ) - Please choose oneCorporate restructuring involves the restructuring of: All of the given optionsPAGE # 121Corporate Restructuring:Corporate restructuring and improved corporate governance areessential parts of economic reform programs under way in manycountries. How can corporations be restructured to promote growthand reduce excessive debt without placing undue burdens on

taxpayers? What framework is needed to promote better corporategovernance? CORPORATE Restructuring involves restructuringthe assets and liabilities of corporations, including their debt-to-equity structures, in line with their cash flow needs to promoteefficiency, restore growth, and minimize the cost to taxpayers.

The assets and liabilities of the company The debt to equity structures of the company Cost minimization by the company

Question No: 40 ( Marks: 1 ) - Please choose oneWhich of the following terms refer to the acquisition of anothercompany using a significant amount of borrowed money (bonds orloans) to meet the cost of acquisition? Management Buyout Management Buy-In Leverage BuyoutPAGE # 124


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Leveraged Buyout LBOThe acquisition of another company using a significant amountof borrowed money (bonds or loans) to meet the cost ofacquisition.

None of the given optionsQuestion No: 41 ( Marks: 1 ) - Please choose oneWhich of the following is NOT among the categories of foreign risk? Transaction exposure Translation exposure Local exposurePAGE # 130Currency RisksWe can classify foreign risk exposure into three broad categories: Transaction exposure Translation exposure Economic exposure

Economic exposureQuestion No: 42 ( Marks: 1 ) - Please choose oneWhich of the following is NOT an external method to reduce thetransaction exposure? Invoicing in home currencyPAGE # 131

External methods: Forward contract Money market hedges Currency futures Currency options Currency swaps

Money market hedges Currency futures Currency swaps

Question No: 43 ( Marks: 1 ) - Please choose oneWhich of the following is the purpose of a Forward Interest RateAgreement? To fix the interest rate To estimate the exchange rate To estimate the interest rate To fix the foreign exchange rate


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PAGE # 136Forward Rate Agreements FRAThis is a contract and a financial instrument that is used has hedgeagainst interest rate adverse fluctuations on deposit or loans startingin near future. This resembles to forward exchange

rateagreements to fix the exchange rates.

Question No: 44 ( Marks: 1 ) - Please choose oneWhich of the following statements is INCORRECT regarding forwardcontracts? Reversing forward contract is difficult. Parties have to put an initial margin in forward contracts.PAGE # 136In forward contract, no margin is required but in currency futureparties have to put an initial margin.

No size restriction is placed in forward contract. Forward contract is made between parties and each party needsto confirm the credit worthiness of each other.

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Question No: 45 ( Marks: 1 ) - Please choose oneIf the exercise price of an option is not favorable than the market

price of the underlying item, an option would be termed as: In the money Out of moneyPAGE # 139If the strike price is not favorable than the current market priceof underlying asset or item, the option is called out-of-money.

At the money None of the given options


Question No: 46 ( Marks: 1 ) - Please choose oneAn investor buys 5 options on shares of at a price of Rs 50 per share.Each option consists of 100 shares and premium paid is Rs. 2per share. What would be the total option cost for investor if the shareprice is Rs. 55 at the expiry of option?


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Rs. 1,0005 *100 =500*2=1,000

Rs. 1,500

Rs. 2,500

Rs. 25,000

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Question No: 47 ( Marks: 1 ) - Please choose oneAn investor buys 5 options on shares at a price of Rs 50 per share.Each option consists of 100 shares and premium paid is Rs. 2 pershare. What would be the net gain for investor if the share price is Rs.55 at the expiry of option? Rs. 1,500Total share is 5 *100 = 500Total cost of option is 500*52=26,000Total Sale Value = 500 * 55 = 27500Net Gain = 27500 26000= 1500 Rs. 2,500 Rs. 1,000 Rs. 25,000

Question No: 48 ( Marks: 1 ) - Please choose oneWhich of the following is the CORRECTstatement regarding the Lawof One Price? The law of one price applies to only tradable goodsPAGE # 145The law of one price only applies to tradable goods; immobilegoods such as houses, and many services that are local, are of coursenot traded between countries. The law of one price applies to all goods The law of one price applies to immovable goods

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Question No: 49 ( Marks: 3 )Explain the main features of a forward rate agreement.


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Answer Page#136Features of FRAs:It is in between bank and client for fixing future interest rate onnotional amount of loan. The loan is for an affirmed period starting ona particular time in future. The size of the notional loan or deposit is

decided between the bank and the client. FRAs are cash settled.On settlement date buyer and seller must settle the agreement.The FRA rate for three months loan/deposit starting in a 6 monthstime is normally expressed as 6v9 FRA.The buyer of a FRA agrees to pay fixed interest rate on notional loan.At the same buyer will receive interest on notional loan atstandard rate of interest. On the other side, seller of FRA agrees topay interest on the notional amount at benchmark rate and receivesinterest at a fixed rate.


Question No: 50 ( Marks: 3 )Differentiate between Management Buyout and Management Buy-In.

Answer Page#123,124 &125Management BuyoutsManagement buyouts are similar in all major legal aspects to any otheracquisition of a company. The particular nature of the MBO lies in theposition of the buyers as managers of the company and the practical

consequences that follow from that. In particular, the due diligenceprocess is likely to be limited as the buyers already have fullknowledge of the company available to them. The seller is also unlikelyto give any but the most basic warranties to the management, on thebasis that the management knows more about the company than thesellers do and therefore the sellers should not have to warrant thestate of the company. In many cases, the company will already be aprivate company, but if it is public then the management will take itprivate.Management Buy In (MBI):

Management Buy in (MBI) occurs when a manager or a managementteam from outside the company raises the necessary finance buys itand becomes the company's new management. A management buy-inteam often competes with other purchasers in the search for a suitablebusiness. Usually, a manager will lead the team with significantexperience at managing director level. The difference to amanagement buy-out is in the position of the purchaser: in the case ofa buy-out, they are already working for the company. In the case of a


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buy-in, however, the manager or management team is from anothersource.


Question No: 51 ( Marks: 5 )Assume that a bookstore uses up cash at a steady rate of Rs.300,000per year. The interest rate is 3% and each sale of securities costsRs.20. Determine the optimal cash balance for the bookstore.

Answer Page#95

Q = 2 FS / iWhere:S = is the amount of cash to be used in each periodF = fixed cost of obtaining new fundsi = interest cost of holding cashQ = quantity of cash to be held per period.

Q = 2 FS / i

= [(2 20 300,000) / 0.03]= [12000000 / 0.03]= 400000000= Rs. 20000

Optimal level of cash = (2FT / I)

= [(2 20 300,000) / 0.03]= [12000000 / 0.03]= 400000000= Rs. 20000

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Question No: 52 ( Marks: 5 )Firm A wants to acquire a private limited company operating in thesame industry. What procedure would be followed by the Firm A toacquire the target company?


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Question No: 53 ( Marks: 5 )Why exchange rates of two currencies fluctuate? Explain brieflyFollowing are some factors for fluctuation:

AnswerRelative interest rates: Onefactor that affects exchange rates is thesize of the differential between the real interest rates available toinvestors in the respective countries. The real interest rate is simplythe nominal interest rate available to an investor in a high qualityshort-term investment subtracted by the country's inflation rate.Trade imbalances: The size of any trade deficit between two

countries will also affect those countries' currency exchange rates. Thisis because they result in an imbalance of currency reserves among thetrading partners.Political stability: If a country's government becomes unstable dueto political gridlock, votes of no confidence, revolution or civil war,confidence can quickly be lost. People become less willing to acceptpaper currency in exchange for their goods and services, primarilybecause they're unsure whether they'll be able to pass the paper alongto the next person.Government involvement: The relative value of a country's

currency is of great importance to its government. The value of acountry's currency affects the wealth of its citizens, thecompetitiveness of domestically produced goods, the relative cost ofthe country's labor, and the country's ability to compete. As a result,governments often try to influence the relative value of their country'scurrencies in a number of different ways, including altering theirmonetary and fiscal policies, and by directly intervening in thecurrency markets.Investors: Perhaps the most powerful factor that can influenceexchange rates over short time frames is the role that speculatorsplay. Investors typically have tremendous amounts of capital that they

can use to either buy or sell any currency. Consequently, their actionscan cause the value of such currency to fluctuate, sometimes quitesignificantly.

END


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FIN622- Corporate Finance (Session - 1) FINAL TERMEXAMINATION (Spring 2010)100% correct solved withreference included objective By Muhammad Afaaq, Faiza Aroob,Hira ali and Dua-e-ZainbRemember Us In Your Prayers

Best regardsMuhammad Afaaq

Mba 3 rd Finance [email protected]

Islamabad

Come join me inhttp://groups.google.com/group/vustudymania0346-5329264If u like me than raise your hand with me

If not than raise ur standard

Thats about me !

Final Term Fin 622

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