Reference no: EM133065150

Question 1:

You have just been asked by the Chief Executive Office of Papermark Ltd to provide some advice as to their dividend policy. Specifically he would like you to answer the following questions.

a) Provide a time line for the dividend payment process for a public company that includes five key events of this process. Briefly explain why the share price drops after the ex-dividend date.

Board Vote
Public announcement or declaration date Ex Dividend Date
Record Date
Payable Date

b) Explain a situation where the announcement of an increase in dividends may be met by a share price fall.

c) Explain how a share buy-back, although it places cash in the hands of its shareholders, is different from a dividend payment.

d) Assume that a company has additional cash on hand right now, although management is not sure about the level of cash flows going forward. If the company would like to put cash in its shareholders' hands, what kind of dividend should it pay, and why?

Question 2:

a) Describe in simple terms what is referred to as (i) purchasing power parity; (ii) interest rate parity

b) Palermo Company sold equipment to a French company. Payment of €4,275,000 will be due in 90 days. Palermo has the option of selling the euros at a 90-day forward rate of $1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How much dollar revenue will Palermo lose by not selling forward the euros? Round to the nearest dollar.

c) Latimer Bank is currently quoting a 180 day forward rate of $1.50/€ while the spot rate is $1.45/€. Interest rates in Australia are currently 2% and 6% in the Euro zone. Indicate whether the forward rate is correctly quoted. If not, what should the rate be?

Question 3:

a) Briefly describe two different working capital investment strategies. What are advantages and downsides for each of these strategies?
b) Govinder Surveying Pty Ltd estimates that it takes the company about 35 days to collect cash from customers on finished goods from the day it receives raw materials and about 45 days to pay its suppliers. What is the company's cash conversion cycle? Interpret your answer.
c) Chesire Pies Ltd sells its products to more than 100 bakeries and cafes. The company's collection period is 21 days, and it keeps its inventory for 6 days. What is Lilly Bakery's operating cycle?
d) Mangos Pty Ltd sells its goods with terms of 5/15 EOM, net 30. What is the implicit cost of the trade credit?

Question 4:

(a) Womble Ltd has $400 million of debt outstanding at an interest rate of 9 per cent and $600 million of equity (market value) outstanding. Womble is subject to a 30 per cent corporate tax rate.

i. What is the amount of the tax shield on that debt, just for the current year?
ii. What is the present value of the debt tax shield if the debt will mature in 4 years?
(b) Smurf Industries Ltd is currently valued at $700 million. Management is planning to repurchase $300 million of its issued shares by issuing non-maturing debt at an 8 per cent annual interest rate. Assuming a perfect market with no transaction or liquidation costs, what value will Smurf Industries have after the capital restructure?
(c) List and briefly describe the three key assumptions in Modigliani and Miller's Proposition 1 that are required for total company value to be independent of capital structure.

Question 5:

You are an analyst at a company that buys private companies, improves their operating performance and sells them for a profit. You were asked to estimate the fair market value of SmartSense Ltd, a company that develops business solutions for infrastructure firms. Gateway is a public company with business operations that are virtually identical to those of SmartSense. You have collected the following information for the two companies.

a) Using the P/E multiple approach what is the value of SmartSense Ltd's equity? What is the total value of SmartSense Ltd?

b) Using the enterprise value/EBITDA multiple, what is the total value of SmartSense Ltd? What is the value of SmartSense Ltd's equity?

c) Interpret the difference in your results for (i) and (ii).

d) Briefly describe how the Free Cash Flow from the company (FCFC) approach can be used to value a business.