Outline
FINC 5001 Capital Markets and Corporate Finance Tutorial Questions and Solutions Topic 1 – Preliminary concepts
Discussion Question 2 The text refers to three types of financial decision – the investment decision, the financing decision and the dividend decision. Describe each in detail, and explain how these decisions relate to the corporate objective. Categorise each of the following decisions in terms of whether it is an investment, financing or dividend decision and explain why it is in that category. (a) (b) (c) (d) (e) (f) (g) (h) Javelin Pharmaceutical Ltd purchases all of the shares in O’Hara Ltd. Tabcorp Holdings Ltd buys new poker machines for its business. Brushwood Ltd hopes to raise $53 million in an equity issue of ordinary shares and will use the funds to repay its long-term debt. Devastation Games Ltd purchases the copyright for a new video game. News Corporation declares a dividend of 20c per share. Brushwood Ltd pays $5 million to repurchase 1% of the shares held by its current shareholders. Creek Ltd announces the raising of $50 million in bonds in the United States. Charles Grogin sells shares to finance his new online wine cellar.
ANSWER The investment decision relates to the manner in which funds raised in capital markets are employed in productive activities. The objective of such investments is to generate future cash flows, thus providing a ‘return’ to investors. The capital budgeting or project evaluation function is the process by which the investment decision is undertaken. Maximising the future cash flows generated will maximise the value of the firm and the wealth of owners. The financing decision relates to the mix of funding obtained from capital markets; that is, the mix of debt and equity issued by the firm to fund its operations. Obtaining the most appropriate sources of finance, taking into account the cost of finance and the risk, will maximise the value of the firm and therefore the wealth of owners. The dividend decision
Discussion Question 2 The text refers to three types of financial decision – the investment decision, the financing decision and the dividend decision. Describe each in detail, and explain how these decisions relate to the corporate objective. Categorise each of the following decisions in terms of whether it is an investment, financing or dividend decision and explain why it is in that category. (a) (b) (c) (d) (e) (f) (g) (h) Javelin Pharmaceutical Ltd purchases all of the shares in O’Hara Ltd. Tabcorp Holdings Ltd buys new poker machines for its business. Brushwood Ltd hopes to raise $53 million in an equity issue of ordinary shares and will use the funds to repay its long-term debt. Devastation Games Ltd purchases the copyright for a new video game. News Corporation declares a dividend of 20c per share. Brushwood Ltd pays $5 million to repurchase 1% of the shares held by its current shareholders. Creek Ltd announces the raising of $50 million in bonds in the United States. Charles Grogin sells shares to finance his new online wine cellar.
ANSWER The investment decision relates to the manner in which funds raised in capital markets are employed in productive activities. The objective of such investments is to generate future cash flows, thus providing a ‘return’ to investors. The capital budgeting or project evaluation function is the process by which the investment decision is undertaken. Maximising the future cash flows generated will maximise the value of the firm and the wealth of owners. The financing decision relates to the mix of funding obtained from capital markets; that is, the mix of debt and equity issued by the firm to fund its operations. Obtaining the most appropriate sources of finance, taking into account the cost of finance and the risk, will maximise the value of the firm and therefore the wealth of owners. The dividend decision