Reference no: EM132558265
Question 1:
i) Explain the role of (a) Corporate Accounting & (b) Corporate Finance in helping the economic growth of a nation.
ii) Is the wealth maximisation goal a short or long-term objective for firms? Explain.
iii) ‘Despite the diversity of financial roles and activities, an understanding of the need for ethics in finance is important in three major areas: Ethics is needed in financial markets, in the financial services industry and by finance people in organisations'. Explain this statement with clear examples.
Question 2:
The primary financial objective of a company is stated by corporate finance theory to be the maximisation of the wealth of its shareholders but this objective is usually replaced by the surrogate objective of maximisation of the company's share price.
Required:
a) Discuss how this substitution can be justified.
As stated above in a) the primary financial objective of corporate finance is usually taken to be the maximisation of shareholder wealth.
Discuss what other objectives may be important to a company quoted on a stock exchange and whether such objectives are consistent with the primary objective of shareholder wealth maximisation.
Required:
b) Discuss this aspect generally but also in the light of a consideration that management wishes to keep the financial gearing level as low as possible, while shareholders would prefer it kept as high as possible.
Question 3
Companies finance their long-term needs through two routes, namely equity finance or debt finance.
Required:
Identify and critically discuss the various ways in which companies can access debt & equity finance. Also discuss the particular problems experienced by small companies with regards to this type of finance whilst highlighting any particular financing avenues which may be available to such companies in this respect.
Question 4
The Garden Division of Chelsea plc has been allocated $600,000 on investment projects for the coming year. Four projects, each with a four year life and with the following cash flows are currently being considered:
|
Year
|
0
|
1
|
2
|
3
|
4
|
|
Project
|
$k
|
$k
|
$k
|
$k
|
$k
|
|
A
|
-300
|
100
|
10
|
200
|
200
|
|
B
|
-200
|
0
|
0
|
0
|
400
|
|
C
|
-100
|
0
|
0
|
80
|
80
|
|
D
|
-150
|
60
|
60
|
60
|
60
|
Required:
(a) Distinguish between hard and soft capital rationing.
(b) Assuming that the projects are divisible recommend to the Board, which projects should be accepted using the Net Present Value method and evaluate the total net present value that would be generated?
(c) Discuss the impact on your analysis if each project is indivisible.