Corporate Financial Strategy: Study Material and Solved Assignments - Desklib

Desklib offers study material, solved assignments, essays, and dissertations on Corporate Financial Strategy. The content covers topics such as valuation of debt, mergers, efficient market hypothesis, and more. The module is relevant for students pursuing courses in finance, accounting, and business management. Course codes and college/university names are not mentioned.

Module title: Corporate
Financial Strategy

TABLE OF CONTENTS
SECTION A.....................................................................................................................................3
Question 1...................................................................................................................................3
Question 2...................................................................................................................................3
Question 3...................................................................................................................................3
Question 4...................................................................................................................................4
Question 5...................................................................................................................................5
Question 6...................................................................................................................................5
SECTION B.....................................................................................................................................6
Question: 8..................................................................................................................................6
SECTION C.....................................................................................................................................9
Question 1...................................................................................................................................9
REFERENCES..............................................................................................................................13

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 being defined as the economic theory which states that price of all
identical asset and commodities will be having the same prices irrespective of their location or
any other factors. This law undertakes the only one price in to account of all the market there is
not any other cost being implemented. This law of one price is being attained by way of
eliminating the price difference with help of arbitrage opportunity which is being present within
the markers. This law of one price is the key foundation for the purchase power parity. This
purchase power parity states that value of two currencies is equivalent in case basked of all
identical tools is prices in both the countries is same.
Question 2
In the present case provided, it is complicated to value B’s debt in comparison to A’s
debt because of the reason that the zero coupon bond will pay a higher return in comparison to
the regular bond having the same maturity. This is particularly the zero coupon bond are more
volatile as compared to the other regular bonds. Also, the long term zero coupon bond the
investors will be attaining the gain because difference between the price which the investor
paying and the amount which they receive at the maturity of bond. Thus, because of this reason
valuation of debt of company B will be more tough and difficult.
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
The major reason for the merger of two companies is that this will provide a synergy to the
company. this is particularly because of the reason that when Major and Minor will come
together then there will be benefit of different aspect like reduction in marketing cost,
distribution cost and many others.
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
Purchase cost= 10000 * 1250 = 12500000
Dragon motors can now buy the contract currently at 1100 that is
10000 * 1100 = 11000000
Profit or loss incurred =
10,000 × ($1,250 − $1,100) = $1,500,000
The cost in the spot market plus the loss in the futures markets gives a total cost of $12,500,000.
Question 6
A
Cost of car = 150000
Interest rate = 9 %
Sum need to be set aside = FV = PV * [1+ (I / n)] (n* t)
= 104792.12
Thus, it can be stated that for providing the sum in four years the person will have to keep the
total of 104792.12 aside today.
B
Amount to be paid yearly = 12000
Interest rate = 7 %
Money need to set aside is
FV = PV * [1+ (I / n)] (n* t)
FV = 12000 * [1 + (0.07/ 4)]
FV= 53279.32
This simply means that for covering the fees, the person need to keep aside 53279 today so that
they can cover the cost or future.
C

The major difference between the compound and simple interest is that compound interest is
being based on the principal amount and the interest is being accumulated on every period
(Lewin, 2019). On the other hands, the simple interest is based on the principal amount of the
loan or the deposit only. Here the interest is not compounded for the different years.
SECTION B
Question: 8
a) and b)
For Bond X
Year Cash flow factor Present value of cash flows
1 90 0.935 84.15
2 90 0.873 78.57
3 90 0.816 73.44
4 90 0.763 68.67
5 90 0.713 64.17
6 1090 0.666 725.94
Bond price 1094.94
Bond duration 4.94
settlement 1-Apr-11 Assumption for a period of 6 years
Maturity 31-Mar-17
Coupon 9%
Yield 7%
Frequency 1
For bond Y
Year Cash flow factor Present value of cash flows
1 60 0.935 56.1
2 60 0.873 52.38
3 60 0.816 48.96

4 60 0.763 45.78
5 60 0.713 42.78
6 1060 0.666 705.96
Bond price 951.96
Bond duration 5.19
settlement 1-Apr-11 Assumption for a period of 6 years
Maturity 31-Mar-17
Coupon 6%
Yield 7%
Frequency 1
c) the major reason behind the difference between duration of Bond X and Y is majorly because
of variation in the coupon rate of both these bonds. This is particularly because of the reason that
it is stated that when coupon rate is lower than duration of the bond will be long. It is due to the
reason that lower payment will be received before the final maturity. On the other hand, when
bond is higher than its duration will be short as more payments will be received before final
maturity.
d)
Year Cash
flow
factor Present value of cash
flows
1 90 0.930233 83.72093023
2 90 0.865333 77.8799351
3 90 0.804961 72.44645126
4 90 0.748801 67.39204768
5 90 0.696559 62.69027691
6 1090 0.647962 706.2780551

Bond price 1070.407696 7.5%
YTM
Year Cash
flow
factor Present value of cash
flows
1 90 0.938967 84.50704225
2 90 0.881659 79.34933545
3 90 0.827849 74.50641826
4 90 0.777323 69.95907818
5 90 0.729881 65.68927529
6 1090 0.685334 747.0141895
Bond price 1121.025339 6.5%
YTM
Volatility of bond = % Change in price / % change in Yield
% change in price = 1121-1070.41 / 1070.41 = 4.7%
Volatility = 4.7% / 1% = 4.7%
e)
Volatility to yield for bond Y = % change in price / % change in Yield
Year Cash
flow
factor Present value of cash
flows
1 60 0.930233 55.81395349
2 60 0.865333 51.91995673
3 60 0.804961 48.29763417
4 60 0.748801 44.92803179
5 60 0.696559 41.79351794
6 1060 0.647962 686.8392096

Bond price 929.5923037 7.5%
YTM
Year Cash
flow
factor Present value of cash
flows
1 60 0.938967 56.33802817
2 60 0.881659 52.89955697
3 60 0.827849 49.67094551
4 60 0.777323 46.63938545
5 60 0.729881 43.79285019
6 1060 0.685334 726.4541659
Bond price 975.7949322 6.5%
YTM
Volatility of Bond Y = % Change in price / % change in Yield
% change in price = 975.79 – 929.59 / 929.59 = 4.97%
Volatility = 4.97% / 1% = 4.97%
f)
Convertible bonds are that fixed income security of the public limited company which can be
converted into common stock of the company.
Benefits to investors
 Earning can be increased in terms of dividend received on shares instead of fixed income
on bonds.
 Investors can have the benefit of enjoying ownership in the company.
SECTION C
Question 1
The EMH theory is concerned with the efficient market hypothesis which articulates that
shares process reflect all the information regarding the company. According to this particular
theory there is highly importance of shares prices as stock always traded at the fair value on the

exchanges. The reason behind trading at fair prices is to make the investors capable of
purchasing undervalued stock and selling the overvalued shares. This theory has basically given
emphasis on making understand that market timing and investing in higher risk related is two
methods that investors can utilize to get high return on stocks. Investors can be benefited by
giving emphasis on two types of strategies like low cost and passive portfolio.
This is included as the modern financial theory that is highly controversial as there has
been many investors argued and found it irrelevant to invest their time in searching for those
stock that are undervalued. In addition to this, it is found to be irrelevant for conducting market
analysis by executing fundamental & technical evaluation techniques. According to the theory
these mentioned analysis cannot produce risk adjusted excess alpha and outcome in out sized risk
adjusted returns (Maksyshko and et.al., 2020). For instance- There are few investors who have
beaten the market over long period which is impossible according to the theory of efficient
market hypothesis. The foremost requirement that need to be understood is the assumption made
that it is cornerstone of modern financial economies.
The particular mentioned theory is concerned with offering in three versions such as
weak, semi strong and strong. As per the model market is generally efficient but it cannot be
competed due to incorporates all the important determining information into current share price.
Weaker from of EMH states that current stock price reflects all the data of past price which no
form of technical analysis can help the investors. In addition to this, semi strong form
articulates that public information is part of current price which cannot be utilized by technical &
fundamental analysis. It is as well involved that there is no emphasis on it though information
not available to public can help investors. The strong from of efficient market hypothesis can
give an investor an advantages on the market. These three version of this particular model of
important part of efficient theory are varying degrees of the same theory. In the current time,
these mentioned parts of the theory can provide assistance to the investors to get the proper
knowledge regarding the efficiency of market by studying the shares prices.
There are several issues that raise questions regarding the efficiency of market and
articulates that it is less efficient. An inefficient market creates the situation in which there is not
proper knowledge regarding no proper information that can be reflected by shares (Sánchez-
Garner and et.al., 2020). Market ineffectiveness may exist due to information asymmetric, less
number of buyers and sellers, market psychology, human emotion, high transaction cost, etc.

these are some of the reasons in which creates the inefficiency and makes difficult to apply the
any of from of theory. In addition to this, strong part of EMH articulates that information is
available in the market in case of both type of company like public and private. The cause
identified for this is modification of EMH exist to reflect the degree to which it can be
implemented in the market.
Semi strong efficiency of EMH implies all public information is computed by investing
time in stocks current market. In order to gain the fundamental & technical gain cannot be
attained by applying technical & fundamental analysis. Weak efficiency is the type of efficient
market hypothesis that articulates that previous prices are reflected in the current prices.
The empirical evidence of efficient market hypothesis has been mixed but generally not
given higher support from the strong kind. This is formulated to adjust the risk prevailing in the
market but cannot be applied directly for accomplishing the objectives of investors to make
evaluation of prevailing condition to have sustainable growth and productivity. There is certain
prediction over the long term, the extent to which the firm obtains rational time varying risk to
study methodology and show the stock prices on average. The empirical evidence given
regarding the weak, semi strong and higher strong can be understood that all information is
presented by the company through share prices (Khan and et.al., 2021). The distinction can be
understood that weak studies historical prices, semi strong give focus on information that is
beyond the historical data and remaining category pay attention on the private information.
In against of this it can be interpreted that there are certain allegation and argument held by the
company in respect to efficient market hypothesis that is not properly give focus on eth
negative side of the mode (Rossi and Gunardi,2018). According to this, it can be identified that it
is impossible to determine the stock value under the situation of efficient market. The
assumption may distract the investors from the appropriate overvaluation as it guides them to pay
attention on investing in low cost & passive portfolio. The another reason for which this
particular theory can be identified as misleading due to the availability of some investors that
possess more skills at analysing public information. These skills provide assistance in getting the
ability to beat the market in effectual manner for the longer duration. The deviation can be
derived in some cases by the investors from the fair value of stock. On the other side it has been
stated that when new information comes in market it is indicated in the current share price of the
stock. The major limitation that is comprised by the EMH theory is involvement of

overconfidence, overreaction, information & representative bias that leads to the inaccurate
instructions and decision-making which results in inappropriate outcome. These are some of the
empirical statement that can be used to provide the appropriate knowledge and effectiveness.

REFERENCES
Books and Journals
Khan, A. and et.al., 2021. Testing the weak form of efficient market hypothesis for socially
responsible and Shariah indexes in the USA. Journal of Islamic Accounting and Business
Research.
Maksyshko, N. and et.al., 2020, July. Comparative analysis of the attractiveness of investment
instruments based on the analysis of market dynamics. In M3E2-MLPEED (pp. 219-238).
Rossi, M. and Gunardi, A., 2018. Efficient market hypothesis and stock market anomalies:
Empirical evidence in four European countries. Journal of Applied Business Research
(JABR). 34(1). pp.183-192.
Sánchez-Granero, M. A. and et.al., 2020. Testing the efficient market hypothesis in Latin
American stock markets. Physica A: Statistical Mechanics and its Applications. 540.
p.123082.
Lewin, C.G., 2019. The emergence of compound interest. British Actuarial Journal, 24.