FNCE623 Final Exam Spring Term 2021Instructor: Raymond ChenStudent Number: “I agree that the work...

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FNCE623 Final Exam Spring Term 2021Instructor:  Raymond ChenStudent Number: “I agree that the work in this pape project/exam/assignment/etc. is my own work and that I have given credit to all sources of information used in my papeproject/exam/ assignment/etc. by including citations and references in the APA format. I acknowledge that I am expected to exercise the utmost academic integrity in all work submitted for this course. SIGNATURE: ______________________    (Print Your Name)Question 1( Mini-Case)  You are newly appointed CFO in a listed Mid-Sized company in the food industry.  Your company financial performance is stable, with ROE is around 8-10%, which is above industry average;   EBIT (Operating Income) interest coverage is sufficient, while company has some seasonality in terms of sales, thus has impact on cash flows.  Long term capital financing the company bond credit rating is A-, which means easy to raise debt, cost is lower than short term boowings.   Identify the capital structure issues that CFO must address and explain the effects and significance of these issues. (3-4 Bulletin points and explain with your understanding, within 350words, 50 Marks)Question 2:  Your company is asking you as a CFO to consider your capital costs for your long term investment projects.  As you collect the recent capital information as the follows: 1. Your company issue the common shares of Cnd$100/share, 2 million shares outstanding;  Your company Beta is 1.7 and market risk free rate is 2% at this moment, and expected market return is 7%; 2. Your company issue the bond at the cuent quote of 970; Your coupon payment rate is 7%, while payment term is semi annual; the bond tenor is 14 years;  Your bond face value is 250million; 3. Your company also issue some prefeed stocks at cnd$70/share, with dividend payment  of cnd7/share, total amount of issue is 100million;Your corporate tax rate is 27%;  Please calculate your company’s WACC (25Marks, show the work progress by each step)Question 3 ( Mini Case); Consider a day on which the S&P/TSX 60 Index, an index of 60 large stocks, rose 59 points. On that same day, assume you are a professional investor has a large portion of investment of Air Canada, which is one of the stocks in the Index, announced some unexpectedly bad news. The price of Air Canada declined $10 on that same day. Using this example, discuss systematic risk, portfolio diversification, and asset specific risk. (25 Marks, list three bulletin points and discussed each within 250words)

Shakeel · Accepted Answer

Answer 1
Some of the issues related to the capital structures that must be addressed are as follows – 
Balanced debt to equity ratio – Since company has sufficient debt raising capacity in the terms of lower the cost of debt and high interest coverage ratio, a higher debt to equity may lead to create leverage in long run that will not only increase the risk of insolvency of the firm but also create the long-term fixed cost obligation to the firm.
Sufficient liquidity – Despite of sufficient interest coverage position of the firm, it must be noted that company cash seasonal cash flow pattern and there may be issue of cash crunch during the financial year. Hence, proper liquidity in the terms of sufficient availability of cash is necessary to maintain. The optimal liquidity can be achieved through a balanced debt-equity proportion in the capital.
Profitability – Company has already been maintaining above ROE. Higher debt in capital may further improve the ROE to great extent. However, excess profitability over equity at the cost of high leverage position is not recommended for the long run. There are many other short -erm costs that may be required to be met in short run. With maintaining the proper profitability with sustainable capital structure may lead to a sustainable growth to the business.
Equity financing – The company’s credit worthiness is better and at the same time, the company’s earnings position is good. However, due to seasonality in sales, the cash flows can be significantly affected especially in the time of low sales and high market competition. Therefore, company must have to ensure the sufficient operating cash flow and cash balance at the end of the year. Equity financing makes the business free from any fixed obligation and thus free from a regular obligation. Equity financing also makes a strong controlling over the company and that can be permitted if the current situation demands so. However, the ROE may get reduced but can be manageable in the situation of already higher ROE.

FNCE623 Final Exam Spring Term 2021 Instructor: Raymond Chen Student Number: “I agree that the work in this paper/ project/exam/assignment/etc. is my own work and that I have given credit to all...

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