Escolar Documentos
Profissional Documentos
Cultura Documentos
CORPORATE FINANCIAL
MANAGEMENT
KHOO YU TING
921227015896
200080
APIRL 2013
TABLE OF CONTENT
TOPIC PAGES
1 Contents 2
2 Task 1 3-4
3 Task 2 5-6
4 Task 3 7
5 Task 4 8-10
6 Task 5 11-13
7 14
References
8 Coursework 15-18
2.0 Task 1
Page 2 of 18
In 2012 Pfizer had 12,000 million shares of common stock authorized ,8,863 million in
issue, and 6,746 million outstanding (figures rounded to the nearest million). Its equity
common stock
Per value=
issue share
448 million
=
8863million
1.2 What was the average price at which shares were sold?
total cost
Average price=
quantity
=$7.98 million
Page 3 of 18
Repurchase = issue share outstanding share
=8863million 6746 million
=2117million
1.4 What was the average price at which the shares were repurchased?
treasury share
Average price repurchase =
repurchase
57391
=
2117
1.5 What was the net book value of Pfizers common equity?
Net common equity =443+70283+44148-57391
=57483million
3.0 Task 2
Page 4 of 18
Inbox Software was founded in 2010. Its founded put up $2 million for 500,000 shares of
common stock. Each share had a per value of $10.
2.1 Construct an equity account for Inbox on the day after its founding.
Ignore any legal or administrative costs of setting up the company.
2.2 After two years of operation, Inbox generated earnings of $120,000 and
paid no dividends. What was the equity account at this point?
Page 5 of 18
2.3 After three years the company sold 1 million additional shares for $ 5 per
share. It earned $250,000 during the year and paid no dividends. What was
the equity account?
Page 6 of 18
4.0 Task 3
The shareholders of the Pickwick Paper Company need to elect five directors. There are
200,000 shares outstanding. How many shares do you need to own to ensure that you can
elect at least one director if
200,000 2+1=100,001share
1,000,000x
x= +1
5
5 x=1,000,000x +5
6 x=1,000,005
166,667.5
x= votes
5
cumulative voting=33,333.5
=33334 share
Page 7 of 18
5.0 Task 4
Insurance is the equitable transfer of the risk of a loss, from one entity to another in
exchange for payment. It is a form of risk management primarily used to hedge against
policyholder, is the person or entity buying the insurance policy. The amount of money to
be charged for a certain amount of insurance coverage is called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete
The transaction involves the insured assuming a guaranteed and known relatively small
loss in the form of payment to the insurer in exchange for the insurer's promise to
compensate (indemnify) the insured in the case of a financial (personal) loss. The insured
receives a contract, called the insurance policy, which details the conditions and
Page 8 of 18
4.2 On some catastrophe bond, payments are reduced if the claims against
the issuer exceed specified sum. In other cases payments are reduced only if
claims against the entire industry exceed some sum. What are the advantages
and disadvantages of the two structures? Which involves more basis risk?
Which may create a problem of moral hazard?
-co-insured above some level and some degree of on-going viablitiy is ensured in the
event of a catastrophe
-the insurance company may over-commit in this area in order to gain additional
premiums.
-some firms may under-commit and yet still enjoy the benefits of lower payment.
4.3 List some of the commodity futures contracts that are traded on
exchanges. Who do you think could usefully reduce risk by buying each of
these contracts? Who do you think might wish to sell each contract?
An agreement to buy or sell a set amount of a commodity at a predetermined price and date.
Buyers use these to avoid the risks associated with the price fluctuations of the product or raw
material, while sellers try to lock in a price for their products. Like in all financial markets, others
Grains Futures
Grains futures are definitely the oldest form of commodity futures to ever exist. In fact,
grains futures are the oldest form of futures contract to ever exist and has been used
between farmers and buyers since ancient times. Grains futures deal with all kinds of
Page 9 of 18
grains with the most popularly traded ones being Corn Futures, Soybean Futures, Rice
Metal Futures
Metal futures are commodity futures that deal with the trading of precious metal such as
gold, silver, copper, palladium and platinum. The most commonly traded metal futures
are the gold and silver futures. There are even E-mini versions for both gold and silver
futures. Due to the price volatility of precious metals, metal futures has always been a
Energy Futures
Energy Futures are commodity futures that deal with energy related products such as
crude oil and heating oil. Indeed, energy futures is one class of futures contracts that gets
reported in financial news every single day due to the tremendous impact energy prices
has on daily life and the economy in general. Energy futures are also highly seasonal and
can be extremely rewarding for futures traders who has a good knowledge of the seasonal
trends of the industry. Most popular energy futures include Light Sweet Crude Futures,
Brent Crude Futures, Heating Oil Futures, Unleaded Gasoline Futures and Natural Gas
Futures.
Page 10 of 18
6.0 Task 5
5.1 Calculate the six-month futures price for each case.
To calculate the six-month future price, we use the following basic relationship for
commodities and for financial futures, respectively.
F2 =S 6 (1+tr y)
1.2
Allen Wrench: 58[1+0.03-( )] = $58.54
58
4
5-year T-Note: 108.93[1+0.03-( )]= $108.20
108.93
Ruple: 3.1(1+0.03-0.06)=3.01reples
5.2 Explain how a magnoosium producer would use a futures market to lock in the selling
price of a planned shipment of 1,000 tons of magnoosium six month from now.
Page 11 of 18
5.3 Suppose the producer takes the actions recommended in your answer to5.2, but after
one month magnoosium prices have fallen to $2,200. What happens? Will the producer
have to undertake additional futures market trades to restore its hedged position?
-magnoosium prices have fallen, the magnoosium producer will receive payment from
the exchange
-not necessary for the producer to undertake additional futures market trades to restore its
hedge position.
5.4 Does the biotech index futures price provide useful information about the expected
future performance of biotech stocks?
-No, spot price, risk free rate of interest and net convenience yield
5.5 Suppose Allen Wrench stock falls suddenly by $10 per share. Investors are confident
that cash dividend will not be reduced. What happens to the futures price?
1.2
48[1+0.03-( )]
48
=48.24
5.6 Suppose interest rates suddenly fall to 4%. The term structure remains flat. What
happens to the six-mouth futures price on the five-year Treasury note? What happens to a
trader who shorted 100 notes at the futures price calculated in part (a)?
4
Future price=118.16[1+0.02-( )]
118.16
=116.52
Page 12 of 18
5.7An importer must make a payment of one million ruples three months from now.
Explain two strategies the importer could use to hedge against unfavorable shifts in the
ruple-dollar exchange rate.
- the importer could buy a three-month option to exchange dollars for ruple
- the importer could buy a future contract, agreeing to exchange dollar for ruples in three
months time.
Page 13 of 18
7.0 References
1. text book
2. http://www.google.com/
3. http://en.wikiversity.org/wiki/
Page 14 of 18
8.0 Coursework
1. Financial intermediaries contribute in many ways to our individual well-being and the
The Payment Mechanism Think how inconvenient life would be if all payments had to be
made in cash. Fortunately, checking accounts, credit cards, and electronic transfers allow
individuals and firms to send and receive payments quickly and safely over long
distances. Banks are the obvious providers of payments services, but they are not alone.
For example, if you buy shares in a money-market mutual fund, your money is pooled
with that of other investors and is used to buy safe, short-term securities. You can then
write checks on this mutual fund investment, just as if you had a bank deposit.
Borrowing and Lending Almost all financial institutions are involved in channeling
savings toward those who can best use them. Thus, it Ms. Jones has more money now
than she needs and wishes to save for a rainy day, she can put the money in a bank
savings deposit. If Mr. Smith wants to buy a car now and pay for it later, he can borrow
money from the bank. Both the lender and borrower are happier than if they were forced
to spend cash as it arrived. Of course, individuals are not alone in needing to raise cash.
Companies with profitable investment opportunities may wish to borrow from the bank,
or they may raise the finance by selling new shares or bonds. Governments also often run
Page 15 of 18
In principle, individuals or firms with cash surpluses could take out newspaper
advertisements or surf the Net looking for those with cash shortages. But it can be
cheaper and more convenient to use a financial intermediary, such as a bank, to link up
the borrower and lender. For example, banks are equipped to check out the would-be
borrowers creditworthiness and to monitor the use of cash lent out. Would you lend
money to a stranger contacted over the Internet? You would be safer lending the money to
the bank and letting the bank decide what to do with it.
Notice that banks promise their checking account customers instant access to their
money and at the same time make long-term loans to companies and individuals. This
mismatch between the liquidity of the banks liabilities (the deposits) and most of its
assets (the loans) is possible only because the number of depositors is sufficiently large
that the bank can be fairly sure that they will not all want to withdraw their money
simultaneously.
Pooling Risk Financial markets and institutions allow firms and individuals to pool their
risks. For instance, insurance companies make it possible to share the risk of an
automobile accident or a household fire. Here is another example. Suppose that you have
only a small sum to invest. You could buy the stock of a single company, but then you
would be wiped out if that company went belly-up. It is generally better to buy shares in a
mutual fund that invests in a diversified portfolio of common stocks or other securities. In
this case you are exposed only to the risk that security prices as a whole will fall.
Page 16 of 18
The basic functions of financial markets are the same the world over. So it is not
surprising that similar institutions have emerged to perform these functions. In almost
every country you will find banks accepting deposits, making loans, and looking after the
payments system. You will also encounter insurance companies offering life insurance
and protection against accident. If the country is relatively prosperous, other institutions,
such as pension funds and mutual funds, will also have been established to help manage
peoples savings.
Of course there are differences in institutional structure, Take banks, for example.
In many countries where securities markets are relatively undeveloped, banks play a
much more dominant role in financing industry. Often the banks undertake a wider range
of activities than they do in the United States. For example, they may take large equity
stakes in industrial companies; this would not generally be allowed in the United States.
Page 17 of 18
2. Voting Procedures
case, each director is voted upon separately and stockholders can cast one vote for each
share that they own. If companys articles permit cumulative voting, the directors are
voted upon jointly and stockholders can, if they wish, allot all their votes to just one
candidate. 8 Cumulative voting makes it easier for a minority group among the
stockholders to elect directors who will represent the groups interests. That is why some
On many issues a simple majority of votes cast is sufficient to carry the day, but the
company charter may specify some decisions that require a supermajority of, say, 75% of
those eligible to vote. For example, a supermajority vote is sometimes needed to approve
a merger.
The issues on which stockholders are asked to vote are rarely contested, particularly
in the case of large, publicly traded firms. Occasionally, there are proxy contests in which
the firms existing management and directors compete with outsides for effective control
of the corporation. But the odds are stacked against the outsides, for the insiders can get
the firm to pay all the costs of presenting their case and obtaining votes.
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