Corporate Financial Strategy: Valuation, Bond Analysis, EMH Theory

MODULE TITLE:
CORPORATE FINANCIAL
STRATEGY

Section A
Question: 1
a.
V= D/ K
Where
V= value
D = dividend in next year
K = required rate of return
V= 8/ 7 %
V= 114.3
Thus, with this it can be stated that the price of share of company A is £114.3
b.
The law of one price is one of the theory of economics, according to which after considering the
currency exchange (by expressing the price in similar currency), the price of all the similar
products in different markets should be the same. It is useful in ensuring the similar purchasing
power in the markets across the globe. It is not exactly the absence of arbitrage opportunities
rather a weaker condition of it (de Azevedo, 2017). Therefore, absence of arbitrage opportunity
can be felt with the application of this theoretical concept.
Question 2
It is easy to value A’s debt as zero coupon bond does not pay any interest amount during the life
of the bond and pay a single amount at maturity which is equal to the face value of the bond. The
difference where the bond is issued at discount and repaid at face value. The face value of the
bond is itself the debt of the company (Guduza and Phiri, 2017). But in case of company B’s
bond, it has a coupon attached to it which requires the company to pay fixed amount of coupon
and also at maturity the payment of face value plus interest needs to be made.
Question 3
A
Gain from merger
Cost Amount
Total cash 30000000
Value of company 25000000

5000000
Add-
Marketing cost 400000
Administrative cost 300000
Distribution cost 100000
Total gain 5800000
B
Cost of cash offer= 30000000+2700000= 32700000
C
Cost of share alternative
50 % holding in major
Value of Major = 40000000
50 % of 40000000= 20000000
D
Question 4
A. False
B. True
C. True
D. True
E. True
F. False
G. True
Question 5
Total 10000 ounces
Price= 1250
Spot price= 1100