Elective: CORPORATE FINANCE MANAGEMENT PART - II

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Elective: CORPORATE FINANCE MANAGEMENT PART - II

Attend any 4 questions.  Each question carries 25 marks

(Each answer should be of minimum 2 pages / of 300 words)

Question. 1.           How do interest tax shields contribute to the value of stockholders’ Equity?Explain.

Answer: A tax shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. For example, because interest on debt is a tax-deductible expense, taking on debt creates a tax shield. Since a tax shield is a way to save cash flows, it increases the value of the business, and it is an important aspect of business valuation.

Case A

Question.2.         Explain the essential trick in pricing any option that is to set up a package of investments in the stock and the loan that will exactly replicate the payoffs from the option.

Answer: Whether you are planning to purchase a put or call option, it pays to know more than just the impact of a move of the underlying on your option's price. Often option prices seem to have a life of their own even when markets move as anticipated. A closer look, however, reveals that a change in implied volatility is usually the culprit.

While knowing the effect volatility has on option price

Question.3.         Why do companies issue Convertibles? Discuss.

Answer: A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion of its nominal value to either cash or a specified number of common shares of equal value. A corporation issues a convertible bond to take advantage of reduced interest rates, since the presence of the conversion option provides upside potential for the bondholders, and these bonds tend to demand lower interest rates compared to standard nominal bonds. Another advantage of issuing convertible bonds

Question.4.         Explain how companies structure their operations and financing to reduce their exposure to political risks.

Answer: For multinational companies, political risk refers to the risk that a host country will make political decisions that will prove to have adverse effects on the multinational's profits and/or goals. Adverse political actions can range from very detrimental, such as widespread destruction due to revolution, to those of a more financial nature, such as the creation of laws that prevent the movement of capital.

In general, there are two types of political risk, macro risk and micro risk. Macro risk refers to adverse actions that will affect all foreign firms, such as

Question.5.         Discuss the links between short-term and long-term financing decisions.

Answer:

Question.6.         Write a descriptive note on the International money market.

Answer:

25 x 4=100 marks

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