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Corporate Finance Past Paper Exams
Corporate Finance Past Paper Exams
QUESTION TWO
Q1A.
1. The efficiency with which a corporation employs assets: Effective
corporate governance ensures the optimal use of resources both intra-firm
and inter-firm.
2. Its ability to attract low-cost capital: Effective corporate governance also
helps to lower the cost of capital by improving the confidence of both foreign
and domestic investors that their assets will be used for the purposes agreed.
3. Its ability to meet the expectations of society: For long-term success,
corporations must comply with the laws, regulations and expectations of
societies where they operate.
4. Its overall performance: When corporate governance is effective, it
provides managers with oversight and holds boards and managers
accountable in their management of corporate assets.
Q1B.
Debt finance
1. Uncertainty.
The main trouble that small businesses face while accessing funds/finance is
the problem of uncertainty. A small business is seriously handicapped by lack
of past record that potential lenders can analyze to determine whether or not
to furnish the small business with the required fund needed for expansion.
2. Lack of credit scoring.
Small businesses are often time neglected by credit scoring agencies. This
singular act of the scoring agencies created a vacuum in one of the most
important criteria required by banks and other financial institutions. And
because of the uncertainties involved, banks always insist that their small
business clients must provide an acceptable credit scoring and base their
decision on this system so as to control exposure.
3. Lack of adequate press coverage.
Because banks and other financial institutions cannot get useful information
that will give them insight into the activities of these small businesses, they
force the small businesses to provide a detailed business plan, list of the
firms assets, details of the experience of directors and managers and show
how they intend to provide security for the sums advanced- you can imagine
the stress.
4. Entangled position.
Entangled position is used to describe a situation where banks are unwilling
o increase credit facility without a corresponding increment in security
(collateral) from the part of the small business that in turn may be unwilling
or unable to make such increment. Some banks even require that the owners
equity in the business be increased before further credit line be given. You
get the point now? They are a kind of entangled.
5. Maturity gap.
It is particularly difficult for small companies to obtain medium term loans
due to a mismatching of the maturity of assets and liabilities. Longer term
loans are easier to obtain than the medium and short term loans. The reason
is because longer term loans are secured with mortgages against property.
6. Interest rate discrimination.
In general, banks and other financial institutions tend to ask for personal
guarantees from owners of small businesses and will set interest rates at
higher levels than those charged to big and established companies.
Equity Finance
7. Lack of market trust.
The stock market may not have confidence in small businesses offer. Even
when they have, they tend to lay or attach little value to it and this will make
the firm to issue out more number of shares (just to raise little amount) that
will in turn further dilute the small companys earnings.
8. Equity gap.
It is difficult to find any wealthy person that will be sincerely willing to invest
in small company (though is possible) when they are likely to be more
attractive investment opportunities from bigger and more attractive firms.
9. LACK OF EXIT ROUTE.
A major problem with obtaining equity finance can be the inability of the
small firm to offer an easy exit route for any investor who wishes to sell their
stock.
QUESTION THREE
Q3A.
An Independent Project is a project whose cash flows are not affected by the
accept/reject decision for other projects. Thus, all Independent Projects which meet
the Capital Budgeting criterion should be accepted.
Mutually Exclusive Are projects when accepting one investment means rejecting
others, even though the latter standing alone may pass muster as good
investments, i.e. have a positive NPV and a high IRR. There are two reasons for the
loss of project independence.
Q3B.
III.
1. To asses the viability of projects.
as conducting financial viability assessments imposes a cost on tenderers
and the entity, assessments should be commensurate with the scale, scope
and relative risk of the proposed project. The process for viability