Corporate Financial Strategy: Study Material and Solved Assignments - Desklib

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

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 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.