MOS3310 Corporate
Finance EXAMS
1-3 What is a firm’s fundamental, or intrinsic, value? What might cause a firm’s intrinsic value
to be different than its actual market value?
Intrinsic value of a company is an estimate of the actual value of the company while the
actual market value of the firm is the current value of the firm based on its stock price.
Therefore, there are chances that the market value is lower or higher than the intrinsic value
because intrinsic value is just an estimation of the value of the firm.
1-4 The president of Eastern Semiconductor Corporation (ESC) made this statement in the company’s
annual report: “ESC’s primary goal is to increase the value of our common shareholders’
equity.” Later in the report, the following announcements were made:
a. The company contributed $1.5 million to the symphony orchestra in Toronto, Ontario,
its headquarters’ city.
b. The company is spending $500 million to open a new plant and expand operations in
China. No profits will be produced by the Chinese operation for 4 years, so earnings will
be depressed during this period versus what they would have been had the decision not
been made to expand in that market.
Discuss how ESC’s shareholders might view each of these actions, and how the actions
might affect the share price.
a. Shareholders would not like this as it would decrease money that they could have used to increase
the shareholder value especially to the shareholders who do not live in the headquarter city.
Ultimately all shareholders are interested in actions that would maximize share price which this
action does not.
b. As long as the analysis is accurate the shareholders should have a positive reaction to the decision
and the share price should increase in the future.
1-5 Edmund Enterprises recently made a large investment to upgrade its technology. While
these improvements won’t have much of an impact on performance in the short run, they
are expected to reduce future costs significantly. What impact will this investment have on
Edmund Enterprises’ earnings per share this year? What impact might this investment have
on the company’s intrinsic value and share price?
The investment made for the upgrade would decline the earnings per share this year as the investment
would not have impact on the performance in the short run. However, this investment would increase the
intrinsic value for the company as it gives a positive image for the future to investors. This would most
definitely increase the share price for the future as the company is expected to save costs. When the
investors have a positive perception for the future the demand for shares would increase which in turn
would increase the price.
1-6 Describe the different ways in which capital can be transferred from suppliers of capital to
those who are demanding capital.
Direct transfers business sells its stocks or bonds directly to savers.
Transfers also make go through investment bank that underwrites the issue.
Transfers can also be made through a financial intermediary.
,1-7 What are financial intermediaries, and what economic functions do they perform?
Institutions or groups known as financial intermediaries serve as a link between lenders and
borrowers. They offer a variety of services, including as collecting deposits, disbursing loans,
handling payments, distributing credit and debit cards, and offering investment guidance.
By controlling the movement of money between lenders and borrowers, they also help to
promote financial stability. Financial intermediaries reduce risk by combining funds from
numerous sources and distributing funds to those in need.
1-8 Suppose the population of Area Y is relatively young while that of Area O is relatively old,
but everything else about the two areas is equal.
a. Would interest rates likely be the same or different in the two areas? Explain.
b. Would a trend toward nationwide branching by banks and trust companies, and the
development of nationwide diversified financial corporations, affect your answer to part a?
(a) Area Y has a relatively young population and therefore their savings would be less and
the demand for loan would be high. This would lead to an increase interest rate.
Whereas area O has a relative old population and hence would have less loan demand
and more savings as they are less consumption oriented. This would lead to lower rate
of interest.
(b) Nationwide branching would surely affect the answer given above, as through
nationwide branching, funds would flow from Area O to Area Y where the demand of
funds is high from a place where supply is high. This would increase interest rate of area
o and decrease the rate of area Y until the rates become roughly equal.
1-9 Suppose a new government was elected in Ottawa and its first order of business was to take
away the independence of the Bank of Canada and to force the BoC to greatly expand the
money supply. What effect would this have on the level of interest rates immediately after
announcement?
If the government takes away the independence of the Bank of Canada and forces it to greatly
expand the money supply, the level of interest rates will likely increase immediately after the
announcement. This is because an increase in the money supply leads to inflation, which
reduces the purchasing power of money.
As a result, lenders will demand a higher interest rate to compensate for the expected loss in
purchasing power of the money they lend .
1-10 Is an initial public offering an example of a primary or a secondary market transaction?
initial public offering (IPO) is an example of a primary market transaction.
1-11 Identify and briefly compare the two primary stock exchanges in Canada today.
The two primary stock exchanges in Canada are the Toronto Stock Exchange (TSX) and the
Canadian Securities Exchange (CSE). The TSX is the larger and more established of the two,
with over 1,500 companies listed and a market capitalization of over $3 trillion. The CSE is a
, smaller exchange, with a focus on smaller and emerging companies, as well as companies in
the cannabis and mining sectors.
The CSE also has a more streamlined listing process and lower listing fees than the TSX.
MINI CASE
Assume that you recently graduated and have just reported to work as an investment advisor
at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Sergei Turganev, a
professional hockey player who has just come to Canada from Russia. Turganev is a highly
ranked hockey player who would like to start a company to produce and market apparel
with his signature. He also expects to invest substantial amounts of money through Balik and
Kiefer. Turganev is very bright, and he would like to understand in general terms what will
happen to his money. Your boss has developed the following set of questions that you must
answer to explain the Canadian financial system to Turganev.
a. Why is corporate finance important to all managers?
b. What are the organizational forms a company might have as it evolves from a start-up
to a major corporation? List the advantages and disadvantages of each form.
c. How do corporations go public and continue to grow? What are agency problems? What
is corporate governance?
d. What should be the primary objective of managers?
(1) Do firms have any responsibilities to society at large?
(2) Is share price maximization good or bad for society?
(3) Should firms behave ethically?
e. What three aspects of cash flows affect the value of any investment?
f. What are free cash flows?
g. What is the weighted average cost of capital?
h. How do free cash flows and the weighted average cost of capital interact to determine a
firm’s value?
i. Who are the providers (savers) and users (borrowers) of capital? How is capital transferred
between savers and borrowers?
j. What do we call the price that a borrower must pay for debt capital? What is the price of
equity capital? What are the four most fundamental factors that affect the cost of money,
or the general level of interest rates, in the economy?
k. What are some economic conditions (including international aspects) that affect the cost
of money?
l. What are financial securities? Describe some financial instruments.
m. List some financial institutions.
n. What are some different types of markets?
a. It provides managers the ability to identify and select strategies and projects. Also, it
allows for managers to forecast funding requirements for their company and creates the
ability to plan strategies for acquiring funds.
b. The three main forms of business organization are (1) sole proprietorships, (2)
partnerships, (3) corporations.
Advantages and disadvantages Q 10-2
c. A company goes public when it sells stock to the public in an initial public as the firm
grows, it might issue additional stock or debt.
An agency problem occurs when the managers of the firm act in their own self-interests
and not in the interests of the shareholders.
Finance EXAMS
1-3 What is a firm’s fundamental, or intrinsic, value? What might cause a firm’s intrinsic value
to be different than its actual market value?
Intrinsic value of a company is an estimate of the actual value of the company while the
actual market value of the firm is the current value of the firm based on its stock price.
Therefore, there are chances that the market value is lower or higher than the intrinsic value
because intrinsic value is just an estimation of the value of the firm.
1-4 The president of Eastern Semiconductor Corporation (ESC) made this statement in the company’s
annual report: “ESC’s primary goal is to increase the value of our common shareholders’
equity.” Later in the report, the following announcements were made:
a. The company contributed $1.5 million to the symphony orchestra in Toronto, Ontario,
its headquarters’ city.
b. The company is spending $500 million to open a new plant and expand operations in
China. No profits will be produced by the Chinese operation for 4 years, so earnings will
be depressed during this period versus what they would have been had the decision not
been made to expand in that market.
Discuss how ESC’s shareholders might view each of these actions, and how the actions
might affect the share price.
a. Shareholders would not like this as it would decrease money that they could have used to increase
the shareholder value especially to the shareholders who do not live in the headquarter city.
Ultimately all shareholders are interested in actions that would maximize share price which this
action does not.
b. As long as the analysis is accurate the shareholders should have a positive reaction to the decision
and the share price should increase in the future.
1-5 Edmund Enterprises recently made a large investment to upgrade its technology. While
these improvements won’t have much of an impact on performance in the short run, they
are expected to reduce future costs significantly. What impact will this investment have on
Edmund Enterprises’ earnings per share this year? What impact might this investment have
on the company’s intrinsic value and share price?
The investment made for the upgrade would decline the earnings per share this year as the investment
would not have impact on the performance in the short run. However, this investment would increase the
intrinsic value for the company as it gives a positive image for the future to investors. This would most
definitely increase the share price for the future as the company is expected to save costs. When the
investors have a positive perception for the future the demand for shares would increase which in turn
would increase the price.
1-6 Describe the different ways in which capital can be transferred from suppliers of capital to
those who are demanding capital.
Direct transfers business sells its stocks or bonds directly to savers.
Transfers also make go through investment bank that underwrites the issue.
Transfers can also be made through a financial intermediary.
,1-7 What are financial intermediaries, and what economic functions do they perform?
Institutions or groups known as financial intermediaries serve as a link between lenders and
borrowers. They offer a variety of services, including as collecting deposits, disbursing loans,
handling payments, distributing credit and debit cards, and offering investment guidance.
By controlling the movement of money between lenders and borrowers, they also help to
promote financial stability. Financial intermediaries reduce risk by combining funds from
numerous sources and distributing funds to those in need.
1-8 Suppose the population of Area Y is relatively young while that of Area O is relatively old,
but everything else about the two areas is equal.
a. Would interest rates likely be the same or different in the two areas? Explain.
b. Would a trend toward nationwide branching by banks and trust companies, and the
development of nationwide diversified financial corporations, affect your answer to part a?
(a) Area Y has a relatively young population and therefore their savings would be less and
the demand for loan would be high. This would lead to an increase interest rate.
Whereas area O has a relative old population and hence would have less loan demand
and more savings as they are less consumption oriented. This would lead to lower rate
of interest.
(b) Nationwide branching would surely affect the answer given above, as through
nationwide branching, funds would flow from Area O to Area Y where the demand of
funds is high from a place where supply is high. This would increase interest rate of area
o and decrease the rate of area Y until the rates become roughly equal.
1-9 Suppose a new government was elected in Ottawa and its first order of business was to take
away the independence of the Bank of Canada and to force the BoC to greatly expand the
money supply. What effect would this have on the level of interest rates immediately after
announcement?
If the government takes away the independence of the Bank of Canada and forces it to greatly
expand the money supply, the level of interest rates will likely increase immediately after the
announcement. This is because an increase in the money supply leads to inflation, which
reduces the purchasing power of money.
As a result, lenders will demand a higher interest rate to compensate for the expected loss in
purchasing power of the money they lend .
1-10 Is an initial public offering an example of a primary or a secondary market transaction?
initial public offering (IPO) is an example of a primary market transaction.
1-11 Identify and briefly compare the two primary stock exchanges in Canada today.
The two primary stock exchanges in Canada are the Toronto Stock Exchange (TSX) and the
Canadian Securities Exchange (CSE). The TSX is the larger and more established of the two,
with over 1,500 companies listed and a market capitalization of over $3 trillion. The CSE is a
, smaller exchange, with a focus on smaller and emerging companies, as well as companies in
the cannabis and mining sectors.
The CSE also has a more streamlined listing process and lower listing fees than the TSX.
MINI CASE
Assume that you recently graduated and have just reported to work as an investment advisor
at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Sergei Turganev, a
professional hockey player who has just come to Canada from Russia. Turganev is a highly
ranked hockey player who would like to start a company to produce and market apparel
with his signature. He also expects to invest substantial amounts of money through Balik and
Kiefer. Turganev is very bright, and he would like to understand in general terms what will
happen to his money. Your boss has developed the following set of questions that you must
answer to explain the Canadian financial system to Turganev.
a. Why is corporate finance important to all managers?
b. What are the organizational forms a company might have as it evolves from a start-up
to a major corporation? List the advantages and disadvantages of each form.
c. How do corporations go public and continue to grow? What are agency problems? What
is corporate governance?
d. What should be the primary objective of managers?
(1) Do firms have any responsibilities to society at large?
(2) Is share price maximization good or bad for society?
(3) Should firms behave ethically?
e. What three aspects of cash flows affect the value of any investment?
f. What are free cash flows?
g. What is the weighted average cost of capital?
h. How do free cash flows and the weighted average cost of capital interact to determine a
firm’s value?
i. Who are the providers (savers) and users (borrowers) of capital? How is capital transferred
between savers and borrowers?
j. What do we call the price that a borrower must pay for debt capital? What is the price of
equity capital? What are the four most fundamental factors that affect the cost of money,
or the general level of interest rates, in the economy?
k. What are some economic conditions (including international aspects) that affect the cost
of money?
l. What are financial securities? Describe some financial instruments.
m. List some financial institutions.
n. What are some different types of markets?
a. It provides managers the ability to identify and select strategies and projects. Also, it
allows for managers to forecast funding requirements for their company and creates the
ability to plan strategies for acquiring funds.
b. The three main forms of business organization are (1) sole proprietorships, (2)
partnerships, (3) corporations.
Advantages and disadvantages Q 10-2
c. A company goes public when it sells stock to the public in an initial public as the firm
grows, it might issue additional stock or debt.
An agency problem occurs when the managers of the firm act in their own self-interests
and not in the interests of the shareholders.
