Topic 1 FINC 2011 Tutorial Solutions

Topic 1 FINC 2011 Tutorial Solutions - FINC 2011 Corporate...

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FINC 2011 Corporate Finance 1 Tutorial Questions and Solutions Topic 1 – Preliminary concepts DQ 1 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. Corporate managers face three important decisions in their attempt to maximise shareholder wealth. These decisions are the investment decision, the financing decision and the dividend decision. Fisher argued that the firm’s investment decision is independent of the preference of the owner and the firm’s financing decision. The investment rule is to invest until the return on the marginal dollar invested equals the cost of funds, that is, maximise net present value. Financial decisions focus on three factors: investment decision , financing decision and dividend decision . 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. 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. The dividend decision relates to the form in which the returns generated by the firm are passed on to equity holders. a) Javelin Pharmaceutical Ltd purchases all of the shares in O’Hara Ltd. Investment Decision b) Tabcorp Holdings Ltd buys new poker machines for its business. Investment decision
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c) 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. Financing decision.
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Topic 1 FINC 2011 Tutorial Solutions - FINC 2011 Corporate...

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