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BMCF5103/HUTECH/NOV15/F-KK

PART A
INSTRUCTIONS:

1. THERE ARE TWO (2) QUESTIONS IN THIS PART.


2. ANSWER BOTH QUESTIONS.

Question 1
a.

Explain the concept of capital market efficiency and its forms.


[4 marks]

b.

Discuss the implications of the efficient market hypothesis for corporate finance.
[12 marks]

c.

Assume that markets are efficient. During a trading day KUBB Bhd, a listed company
announces that it has secured a contract for a large infrastructure project that, prior to
the news, it was widely believed to have lost the contract. If the market is efficient, how
should the stock price react to this information if no additional information is released?
[4 marks]
[TOTAL: 20 MARKS]

Question 2
a.

Discuss the main areas of concern of corporate finance and the goal of financial
management in a for-profit business.
[8 marks]

b.

Explain why maximizing profit is not a suitable goal for a company.


[6 marks]

c.

Suppose you own 1,000 shares of British America Tobacco (BAT) stock which you
intend to sell today. Since you will sell it in the secondary market, BAT will receive no
direct cash flows as a consequence of your sale. Why, then, should BAT's management
care about the price you get for your shares?
[6 marks]
[TOTAL: 20 MARKS]

BMCF5103/HUTECH/NOV15/F-KK

PART B
INSTRUCTIONS:

THERE ARE FIVE (5) QUESTIONS IN THIS PART.


ANSWER THREE (3) QUESTIONS ONLY.

Question 1
a.

Discuss the similarities and differences among the adjusted present value, the flow to
equity and the weighted average cost of capital methods of capital budgeting with
leverage and the guidelines for using each method.
[12 marks]

b.

A project has a NPV, assuming all equity financing, of $500,000. To finance the project,
debt is issued with associated floatation costs of $50,000. The floatation costs can be
amortized over the project's 5 year life. The debt of $8 million is issued at 10% interest,
with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is
25%, calculate the project's APV.
[8 marks]

[TOTAL: 20 MARKS]

Question 2
a.

Describe the three basic legal procedures that one firm can use to acquire another and
briefly discuss the advantages and disadvantages of each.
[6 marks]

b.

Sometimes the management of a target firm fights a takeover attempt even when that
attempt appears to be in the best interest of the shareholders. Why would management
take this stance?
[4 marks]

c.

Empirical evidence strongly indicates that the stockholders of the target firm realize large
wealth gains as a result of a takeover bid but the stockholders in the acquiring firm gain

BMCF5103/HUTECH/NOV15/F-KK

little, if anything. Although there exists no definitive answer as to why this is the case,
several possible explanations have been proposed. List and explain three of these
possible explanations for the minimal returns to the acquiring firm's stockholders.
[6 marks]
d.

Firm C was worth $50 million and Firm A had a market value of $40 million. Firm C
acquired Firm A for $45 million because they thought the combination of the new Firm
CA was worth $100 million. What is the synergy from the merger of Firm C and Firm A?
[4 marks]
[TOTAL: 20 MARKS]

Question 3
a. Explain why the costs of selling equity are so much larger than the costs of selling debt.
[5 marks]
b. Discuss the difference between best efforts underwriting and Dutch auction underwriting.
[6 marks]
c. BCG Bhd. has 600,000 shares outstanding with a current market price of $1.60 per
share. The company needs to raise an additional $180,000 to finance new expenditures,
and has decided on a rights issue. The issue will allow current stockholders to purchase
one additional share for 10 rights at a subscription price of $1.20 per share.
Required:

BMCF5103/HUTECH/NOV15/F-KK

Calculate the ex-rights price that would make a new stockholder indifferent between
buying shares at the old stock price and exercising the rights or buying the shares exrights.
[5 marks]

ii.

If the ex-rights price were set at $7.90, would you as a potential new stockholder choose
to buy shares ex-rights or buy shares at the old price and exercise your rights?
[4 marks]

Question 4
a. Explain the major differences between an OTC forward contract and an exchange traded
futures contract.
[8 marks]
b. Explain short hedge and long hedge by giving an example for each of the hedges.
[6 marks]

c. You have taken a short position in a futures contract on corn at $2.60 per bushel. Over
the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. You then decide to
reverse your position in the futures market on the fifth day at close. What is the net
amount you receive at the end of 5 days?
[3 marks]
d. Petronas Bhd., a large Malaysian oil producer, would like to hedge against adverse
movement in the price of oil because this is the firms primary source of revenue. Explain
what should the firm do to reduce the risk of oil price declining.
[3 marks]
.

[TOTAL: 20 MARKS]

BMCF5103/HUTECH/NOV15/F-KK

Question 5
a.

Describe the foreign currency and home currency approaches to capital budgeting.
Which is better? Which approach would you recommend a Vietnam firm use? Justify
your answer.
[6 marks]

b.

Are exchange rate changes between the U.S. dollar and the Japanese yen necessarily
good or bad for Japanese automakers? Explain your reasoning.
[5 marks]

c.

Describe the various types of exchange rate risk and discuss some common approaches
to managing the effect of fluctuating exchange rates on cash flows and value of the
international firm.
[9 marks]
[TOTAL: 20 MARKS]
QUESTION PAPER ENDS HERE

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