CORPORATE FINANCE

(The assignment requires knowledge, understanding and application of Capital Structure,
Financial Ratios, Capital Budgeting, NPV, IRR, Investing, Types, nature and functions of
Markets.)
Assignment Question (100 %)
QUESTION 1.
a) Gande Corporation has been facing tough competition from its rival Tundi Corporation for many
years now. In this post pandemic period, Gande Corporation is planning to bring in lot of
changes and therefore taking necessary steps to strengthen their business financially and
hence it is in the process of evaluating its capital structure. The following information is
available for Gande Corporation:
– The summary of the balance sheet of the company is given below:
Assets (in million) Liabilities (in million)
Fixed Assets 4000 Debt 2500
Current Assets 1000 Equity 2500
You are also provided with the additional information as follows:
– The debt is in the form of long-term bonds, with a coupon rate of 10%. The bonds are currently
rated AA and are selling at a yield of 12% (the market value of the bonds is 80% of the face value).
– The firm currently has 50 million shares outstanding, and the current market price is $80 per
share. The firm pays a dividend of $4 per share and has a price/earnings ratio of 10.
– The stock currently has a beta of 1.2. The six-month Treasury bill rate is 8%.
– The tax rate for this firm is 40%.
Required:
(i) Compute the debt/equity ratio for Gande Corporation in book value terms and also in
market value terms?
(ii) Compute the debt/(debt+equity) ratio for Gande Corporation in book value terms and
also in market value terms?
(iii) Advise the CEO on Capital Structure for enhanced financial performance. Be creative
in presenting relevant literature.
DBA-CF-JAN¶22 Page3
b) The CEO of Gande wants to have some knowledge on the financial performance of its
competitors and therefore providing you with the following information of Tundi Corporation
who is their competitors for years now.
Debt/Equity Ratio 50% 25%
Variance in EBITDA 20% 40%
EBITDA/MV of Firm 25% 15%
Tax Rate 40% 30%
R&D/ Sales 2% 5%
Required:
(i) Based on your calculations (above A) and from the provided information for Tundi
Corporation, advise the CEO of Gande on the nature and the performance of debts.
(ii) Recommend the CEO of Gande on the financial matters as you think best to keep
Tundi far behind them.
c) The health of a company can be understood by examining its key financial ratios and te
financial activities it undertakes. The financial ratios reveal performance of a company and
the relationships between different accounts from financial statements. And the Activities
are geared towards strengthening of te overall performance of the company. And therefore
Gande Corporation is in pursuit of many major and minor business activities in a desire to
provide a saleable product and/or service, and with the goal to yield a satisfactory return
in business.
Required:
I. You are required to advise the CEO of Gande by briefly describing the financial ratios with
suitable example so that the CEO gets a direction to improve the financial performance for
the Corporation.
II. A company pursues many major and minor business activities in a desire to provide better
services, and with the goal to yield a satisfactory return in business. You are required to
identify and briefly explain any four major business activities that would help Gande
Corporation.
DBA-CF-JAN¶22 Page4
d) The CEO of Gande Corporation is deciding whether to proceed with one of two projects
that have a three-year life. Their respective IRR (highlighted) assuming relevant cash flows
are as follows ($000s):
Cost Annual Net Inflows IRR
Year 0 1 2 3
Project 1 1,000 500 700 900 43 %
Project 2 1,000 1,000 500 500 54 %
GiYen WhaW Gande¶V coVW of capiWal iV a XnifoUm 10 peUcenW WhUoXghoXW each pUojecW:
Required:
i. You are required to compute the appropriate PV discount factors.
ii. YoX aUe UeqXiUed Wo deUiYe each pUojecW¶V NPV compaUed Wo IRR and highlighW Zhich (if
any) maximises corporate wealth according to both investment criteria.
iii. Applying the NTV concept to prove that NPV maximises wealth in absolute money terms.
iv. Advise the CEO the rationale for IRR and NPV rank projects differently using a graphical
analysis.
e) Gande Corporation has just set the company dividend policy at $0.50 per year. The
company plans on being in business forever. Keeping in mind the pandemic that there is a
growing awareness on managing finance for future use. Among those are on the stock
trading in the stock markets. The CEO of Gande Corporation has a limited knowledge that
there are two types of markets namely primary market and the secondary market and
further seeks your expert advice.
Required:
(i). You are required to calculate the price of this stock if an investor wants (a) a 5% return, b)
a 10% return and (c) a 20% return?
(ii). You are required to explain the two types of markets with suitable examples with special
reference to bear market and bull market.
(iii). You are required to advise on the function of a specialist in the secondary market?
(iv). You are required to differentiate common stock from preferred stock?
DBA-CF-JAN¶22 Page5
PRESENTATION
Instructions for the Presentation:
Your work should be word processed in accordance with the following:
x Font style, Gill Sans MT, font size 12
x 1.5 line spacing.
x The page orientation should be µpoUWUaiW¶
x Margins on both sides of the page should be no less than 2.5 cm
x Pages should be numbered
x Your VWXdenW¶V name and number should be included on every
page.
x You should provide your word count at the end of yourreport.
Criteria for the Presentation:
Instructions for the REPORT:
REPORT As the assignment requires several tasks to be completed, the required
report format of 4,000 to 4,500 words (maximum) should be organized
as follows:
1. Executive Summary (200-300 words, not to be included in the
word count)
2. Table of contents (not to be included in the word count)
3. Introduction
4. Main body
The main body should address the requirements as stated in
parts (a), (b), (c) (d) and (e) of the question.
5. Conclusion
6. References
You are required to reference / research books and
journals, apart from online sites, using the Harvard
Referencing Style.
Number: 14
DBA-CF-JAN¶22 Page6
Criteria for the REPORT:
1. Executive Summary [5%] 2. Table of contents [3%] 3. Introduction [7%] 4. Main body [70%] is broken down into parts (a), (b), (c), (d) and
(e) overall presentation:
(a) [maximum: 20%]:
x Computation of debt ratio.
x Computation of debt equity ratio.
x Capital structure required for the corporation.
x Relevant formulas and literatures
(b) [maximum: 15%]:
x Critical evaluations of the competitors
x Providing suggestions and strategies financial improvement
(c) [maximum: 10%] x Identify and analyses the ratios.
x Critically provide suggestions for the corporation.
(d) [maximum:10%] x Computing PV, NPV & IRR
x Providing Graphical analysis
x Providing suggestions for the corporation
(e) [maximum: 10%] x Critically e[amine compan\¶V stock.
x Advice the corporation with suggestions
(f) Overall presentation [5%]:
x Clearly laid out and presented?
x Accurate in spelling and grammar?
5. Conclusion [10%] 6. References [5%] This assignment requires you to demonstrate the skills learned in this module and display critical
thinking ability. Produce clear and specific reasoning and argument to justify your answer
DBA-CF-JAN¶22 Page7
.
Assessment Grading Criteria
Classification Mark (%) Description
Distinction 70-100 As foU ³60-69 maUkV´ b and plXV Whe folloZing:
Shows clear evidence of wide and relevant reading and an
engagement with the conceptual issues. Develops a sophisticated
and intelligent argument. Shows a rigorous use and asophisticated
understanding of relevant source materials, balancing appropriately
between factual detail and key theoretical issues. Materials are
evaluated directly and their assumptions and arguments challenged
and/or appraised. Shows original thinking and a willingness to take
risks.
Commendation 60-69 Shows strong evidence of critical insight and critical thinking.
Shows a detailed understanding of the major factual and/or
theoretical issues and directly engages with the relevant
literature on the question set. Develops a focused and clear
argument and articulates clearly and convincingly with a
sustained train of logical thought. Shows clear evidence of
planning and appropriate choice of sources and
methodology/concepts/models.
Pass 50-59 Shows areas on able understanding of the major factual and/or
theoretical issues involved. Shows evidence of planning and
selection from relevant sources. Demonstrates some knowledge
of the relevant literature. Text shows, in places, examples of a
clear train of thought or argument. Text is introduced and
concludes appropriately.
Marginal Fail 40-49 Shows some awareness and understanding of the factual or
theoretical issues, but with little development. Misunderstandings
are evident. Shows some evidence of planning, although
irrelevant/unrelated material or arguments areincluded
Poor Failure <40 Fails to answer the assignment question or to develop an argument that relates to the question set. Does not engagewith the relevant literature or demonstrate acknowledge of the key issues. Contains clear conceptual or factual errors or misunderstandings. Academic honesty Please acknowledge all references and sources that you use in your work. This is not just good manners but also academic honesty. Executive Summary (200-300 words) Table of contents (Words not to be counted Introduction (~400 words) Main body (broken down into parts (a), (b), (c), (d) and (e) overall presentation) (a) [maximum: (~900 words) • Computation of debt ratio. • Computation of debt equity ratio. • Capital structure required for the corporation. • Relevant formulas and literatures (b) [maximum: (~700 words) • Critical evaluations of the competitors • Providing suggestions and strategies financial improvement (c) [maximum: (~500 words) • Identify and analyses the ratios. • Critically provide suggestions for the corporation. (d) [maximum: (~500 words) • Computing PV, NPV & IRR • Providing Graphical analysis • Providing suggestions for the corporation (e) [maximum: (~500 words) • Critically examine company’s stock. • Advice the corporation with suggestions 5. Conclusion (~500 words) 6. References (14 references with weblink is required)