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Nelson EducationHigher EducationContemporary Financial Management, First Edition | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Internet Problems1. The Role and Objective of Financial Management 2. The Domestic and Global Finanaical Marketplace 3. Evaluating and Forecasting Financial Performance 5. Fixed Income Securities: Characteristics and Valuation 6. Common Shares: Characteristics and Valuation 7. Analysis of Risk and Return 8. Capital Investment Decisions 9. Capital Budgeting and Cash Flow Analysis 10. Capital Bugeting: Decision Criteria and Real Options 11. Capital Budgeting and Risk 12. Capital Structure Concepts 13. Capital Structure Management 15. Working Capital Policy and Short Term Financing 18. Managing International Risk
2 The Domestic and Global Finanaical Marketplace 1. On July 15, 2003 the Bank of Canada adjusted the overnight lending rate target. What impact did this have on the Canadian dollar relative to the American dollar? Why? Is this what you would have expected? (Visit the Bank of Canada's website www.bankofcanada.ca ). 2. Nortel Networks announced on June 7th, 2002 two concurrent public offerings. After reviewing the press release (www.sedar.com): determine who the underwriting syndicate was, what the Green Shoe option was (A second press release was issued June 10th, 2002 on over allotments), and estimate the overall issuance costs. 3. Review the following companies' Annual Report (Notes to Financial Statements) to see how each manages their foreign currency risk: Barrick Gold, Loblaw Companies, and Molson Inc. (www.sedar.com or the company's website).
3 Evaluating and Forecasting Financial Performance 1. Use the Income Statements from the Annual Reports (Annual Reports can be obtained by visiting www.sedar.com OR through the company's website) of The Forzani Group, Le Chateau and Reitmans to calculate each company's: a. Inventory turnover b. Fixed-asset turnover c. Net profit margin d. Debt-to-equity ratio e. Return on shareholders' equity From your initial analysis, which company appears stronger on the first three ratios? How do the first four ratios affect the ROE? 2. IMAX Corporation bought back $70.4 million of convertible subordinate notes during September to December 2001 for approximately 24% of their face value. After reviewing the annual report for 2001, calculate the debt-to-equity ratio before and after the buyback. Has the risk level of the company changed? How was this transaction booked on their income statement for fiscal 2001? 3. Analyze Magellan Aerospace's return on equity in the company's latest annual report. Conduct the following sensitivities to see their influence on ROE: a. Increase net profit by 20% b. Decrease total asset turnover by .7 times c. Decrease total equity by 25% Which variable has the largest influence on ROE?
4 Time Value of Money 1. Using the latest published mortgage rates by major lenders (this can be found using a search engine such as www.google.ca ), calculate the monthly payments for two lenders with different interest rates for each term offered. Base your calculations on an $180,000 mortgage amortized over 25 years. What is the difference between the monthly payments? What is the increase to monthly payments if the amortization period is reduced to 20 years? 2. Calculate the current yield of the following three preferred shares: TransAlta Corp Preferred A, National Bank Preferred K, and Bell Canada Preferred A. What will the share price be if the yield increased by 1%? What will the share price be if the yield decreased by 2%? 3. Interest rates charged on credit cards can range dramatically. Searching the Internet, find the interest rate for a Canadian department store card, a regular Visa or MasterCard, and a low-rate Visa or MasterCard. Calculate the effective rate on each card. How does this differ from the annual rate?
5 Fixed Income Securities: Characteristics and Valuation 1. The Royal Bank of Canada has four different classes of preferred shares. Based upon current prices, calculate the yield of each and then review the attributes of each class in a recent annual report. Why are the rates different between the lowest and highest yielding preferred share? 2. Bombardier uses both short-term and long-term debt to finance its operations. Review the notes to the latest annual financial statement to see how the company manages its debt and what covenants may exist. (Statements can be obtained through the company's website or www.sedar.com ) 3. Nortel Networks filed a short form shelf prospectus in May 2002 that outlines the attributes of the company's preferred shares and debt offerings. Review the prospectus from the Sedar website (www.sedar.com ) to get a better understanding of the restrictions placed on management and the rights of both preferred shareholders and bondholders (The entire document provides good insight into an investor's risk. Document pages 23 - 25 highlight preferred shares and debenture rights/privileges.)
6 Common Shares: Characteristics and Valuation 1. Bank of Montreal, Empire Company, Royal Bank of Canada, and Sobeys have all increased their quarterly dividends in 2003. What impact has this had on share prices? Why? 2. Investors Group, Le Chateau, Nortel Networks and TransAlta Corp. have different dividend payouts. After reviewing each company and their common share's dividend yield, what reasons can you think of for the differences? 3. Using a source for analyst forecasts on company's earnings (This information can also be found at www.globeInvestor.com, and www.zacks.com ), review the growth forecasts for Biovail, Canadian National Railway, Shell Canada, and TELUS. What growth rate is projected over the next 3 years? How large is the variance between the lowest estimate and the highest estimate?
7 Analysis of Risk and Return 1. Assuming investors are expecting the TSX market to increase by 8.5% over the next 12 months, calculate the expect return on shares of Barrick Gold, Magna, Nortel, and Thomson Corporation. Use the current yield on Treasury bills (visit www.bankofcanada.ca) 2. Build a portfolio of shares from five Canadian companies listed on the TSX (Use an Internet search engine to locate beta and share quotation providers). What is the portfolio's beta? If you were expecting the overall market to increase strongly during the next 12 months, how would you adjust the share weightings? 3. What does the current yield curve (www.bankofcanada.ca) tell you about the direction of short-term and long-term interest rates?
8 Capital Investment Decisions 1. Using the latest annual reports and the Internet, calculate the weighted cost of capital for Agrium Incorporated and Magna. 2. Cara Operations re-purchased all outstanding shares of the company during fall 2003 at a substantial premium over the pre-announcement share price. Why did the company make this type of investment in its own securities? (Company press release August 29, 2003) What was the expected return on the common shares before the purchase? 3. Review the capital project announcements by Canadian oil sands producers (Shell Canada, Suncor, and Syncrude). What criteria do you believe was used to evaluate these capital investment decisions? Do the press releases provide any indication to whether the firm value will increase?
9 Capital Budgeting and Cash Flow Analysis 1. Visit Canada Custom and Revenue Agencies website (www.ccra-adrc.gc.ca) and search "forms & publications" for information on the Capital Cost Allowance. Which class has the highest CCA rate? What impact does the CCA rate have on evaluating a capital project's CCA tax savings? 2. Nortel has divested segments of its operation over the past three years. Who purchased these assets and why did they purchase them at a time when the economy was believed to be in a recession? 3. Choose a publicly-traded Canadian company in your community that has recently expanded in Canada or upgraded its capital equipment. Using the many sources available on the internet, establish a list of criteria that you believe the company used to approve of the capital investment.
10 Capital Bugeting: Decision Criteria and Real Options 1. Many organizations use a different set of criteria to assist in the capital budgeting process. Search the Internet for "capital budgeting criteria" to see how different organizations evaluate capital projects. 2. In 1998, Suncor Corp. approved a $2.2 billion budget for the oil sands Project Millennium. The project exceeded costs by over 50%. Review the company's annual report and press releases to see what impact the cost overruns had on the company and the initiatives they have under taken to mitigate this risk in the future. (visit www.suncor.com ) 3. Review a capital project undertaken by BC Hydro, Ontario Hydro, and TransAlta Corp. What types of real options can you identify? (www.bchydro.com, www.ontariohydroenergy.com, and www.transalta.com)
11 Capital Budgeting and Risk 1. Using an Internet search engine, review two or three different websites that provide details and examples of sensitivity analysis used for capital projects. (Use a broader search query, such as sensitivity analysis capital projects, to refine your results) 2. What discount rate would grocery retailer Sobeys use if it decided to enter the multimedia and graphic industry similar to ATI Technologies? Using ATI Technologies current beta and both companies' financial statements, calculate the discount rate Sobeys would use to evaluate this project. 3. Search the Internet for companies engaged in large capital projects (manufacturing, energy, forestry, and mining). What financial techniques do they use to evaluate capital projects?
12 Capital Structure Concepts 1. Calculate the capital structure for the following companies using recent financial statements (these can be obtained through Sedar or from the company's website): Angiotech Pharmaceuticals, Canadian Natural Resources Ltd, Reitmans, and Tembec Inc. How do the capital structures differ from industry to industry? 2. Find three Canadian companies that trade both on the TSX and the NYSE. Locate the previous day's closing share price for each company and the closing US exchange rate from the Bank of Canada website. Based upon your calculations, did any arbitrage opportunities exist? Assuming no transaction costs, how would you profit from any arbitrage opportunity? 3. On September 23rd 2003, WestJet Airlines announced the sale of common shares from Treasury. What affect did the announcement have on the share price? What signal was management sending to the market? Calculate the pre and post share issue capital structure. How has the capital structure and financial risk of the company changed?
13 Capital Structure Management 1. Choose a Canadian company from the forestry, grocery, and manufacturing industries. Using recent annual financial statements calculate the degree of financial leverage. How do the three industries compare? Which has the highest leverage factor? What impact does the leverage have in the event of a downturn in net operating earnings? 2. Using recent annual financial statements, compare the degree of operating leverage for Molson's, Sleeman Breweries, and Vincor International. How do the three companies compare? Which company is most sensitive to changes in sales? 3. Choose three Canadian companies from the same industry. Using current financial statements and share prices, calculate the price-earnings ratio of each company. Why do you think there is a different ratio for each company?
14 Dividend Policy 1. Choose one publicly traded Canadian company that has consistently paid a dividend over the past 5 years. Using historical financial information from an annual report, calculate the dividend payout ratio for the past 5 years. How has this changed? Has the amount of the dividend been consistent or has it changed? Based upon this pattern what type of dividend policy does the company have? 2. Calculate the dividend yield for Emera, Rothmans, TransAlta Corp, and TransCanada Corp. What type of investors do you feel would most likely hold these securities? 3. Use two or three different companies that have changed their dividend over the past two years to provide some insight into the immediate impact the signal had on share prices. (Some examples would include the major Canadian Banks, Nortel, and AGF Management.)
15 Working Capital Policy and Short Term Financing 1. Calculate the inventory conversion period using recent financial statements from Canadian retailers: Canadian Tire, Hudson Bay, and Sears Canada. How do the three companies compare? 2. Determine the cash conversion cycle for the past two years for Telus Corporation. From your findings, what areas of the company have improved? Which are weaker? 3. Conduct an internet search for Accounts Receivable Factoring Canada. What types of companies offer this service? What fees are associated with these services?
16 Current Asset Management 1. Search the Internet for companies specializing in providing just-in time management systems. Review the website to locate any client case studies. What types of services were provided? What benefit did the change in inventory control have on the company? 2. Choose two publicly traded Canadian companies in the same industry. Calculate the percentage of current assets that are held in inventory for each company. What portion of current assets is attributed to cash and marketable securities? 3. Visit the Canadian website for Dun & Bradstreet. What types of services are available to help companies screen credit applicants?
17 Managing Domestic Risk 1. Visit the Montreal Exchange to view the current option prices for Canada's largest companies. Compare the current option price (use the same month) of three companies with their recent share price. How do they compare? 2. Choose two different warrants for Canadian companies. Using the warrant calculator available at www.numa.com calculate the value. Does the value match with what the current trading price for the warrants? 3. Determine the conversion value and bond value for convertible debentures from Decoma International and Magellan Aerospace. Which value is closer to the actually trading price? Why?
18 Managing International Risk 1. Visit the Bank of Canada website to familiarize yourself with foreign currencies. Pick a foreign currency and use the currency converter to calculate historic exchange rates over the past two years. What fluctuations has the currency experienced? 2. Choose a Canadian company with operations throughout the world (for example, Barrick Gold, Nortel, and Bombardier). After reviewing their annual report and financial statements, determine how the company handles its foreign exchange risk exposure. 3. Determine the exchange rates based on the theory of purchasing power parity by visiting cyber grocery markets (such as UK: Tesco, US: Albertson's, Canada: Cybermarket IGA) and picking a commodity grocery items that is available in all markets (such as Coke or Pepsi). How do your exchange rates compare with the current spot rates?
19 Leasing 1. Review WestJet Airlines' annual report. What type of leases are noted on the company's financial statements? 2. Search the Internet for lease-versus-buy calculators. Using your choice of a new car as an example, enter in the necessary details. Which option is better? 3. Can you find any examples of Canadian companies that have conducted a sale and leaseback agreement over the past year? How much funds were raised? What were the benefits for the company?
20 Corporate Restructuring 1. In a hostile takeover, Indigo Books & Music acquired Chapters. Visit www.sedar.com or Canadian Newswire to view historic press releases from Indigo Books during the hostile takeover period (2000 & 2001). What types of anti-measures did Chapters use to try and prevent the takeover? 2. Onex Corporation has made many acquisitions over the past decade. Review the company's website and annual reports to see what types of mergers the company has conducted and the payment terms. 3. Search the Internet for Canadian bankruptcy trustees and services. What types of services do they offer?
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