Corporate Finance Decisions Quiz

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Questions and Answers

A mature, dividend-paying corporation with a stable earnings stream is contemplating a major strategic shift towards a high-growth, capital-intensive business venture. This transition necessitates a fundamental reassessment of the company's capital allocation policies and financial risk profile. Which capital structure adjustment would be most appropriate to support this strategic shift, ensuring alignment with the company's evolving risk tolerance and investment opportunities?

Issuing a substantial amount of senior unsecured debt to finance the high-growth venture, while simultaneously increasing investments in defensive industries and hedging strategies to mitigate the increased financial and operational risk associated with the strategic shift.

Increasing reliance on short-term debt financing to capitalize on lower interest rates and maintain financial flexibility, while simultaneously reducing investments in long-term research and development projects to minimize short-term earnings volatility.

Implementing a share repurchase program to reduce the outstanding equity base, thereby increasing earnings per share and signaling confidence in the company's future prospects, while simultaneously maintaining a high dividend payout ratio to appease income-oriented investors.

Divesting non-core assets to generate cash for reinvestment in the high-growth venture, while simultaneously suspending the dividend payout to conserve cash and reinvest in growth opportunities, thereby signaling a commitment to long-term value creation. (correct)

A global manufacturing company seeks to optimize its supply chain financing strategy to improve working capital efficiency and strengthen relationships with its suppliers. Faced with fluctuating commodity prices, geopolitical risks, and evolving regulatory requirements, which integrated financing approach would best mitigate these challenges and enhance the resilience of the company's supply chain?

Negotiating exclusive supply agreements with a limited number of large, financially stable suppliers, thereby reducing supply chain complexity and streamlining procurement processes, increasing the risk of supply chain disruption.

Implementing a dynamic discounting program, offering suppliers accelerated payment in exchange for pre-determined discounts, thereby reducing the company's payables balance and improving its cash conversion cycle, while simultaneously hedging commodity price risk through the use of financial derivatives. (correct)

Securitizing the company's accounts receivable portfolio to access lower-cost funding in the capital markets, while simultaneously extending payment terms to suppliers to maximize working capital efficiency, increasing the risk of trade disputes.

Establishing a captive finance company to provide financing to the company's suppliers, thereby capturing a portion of the supply chain profit margin and exerting greater control over supplier relationships, enabling the company to dictate commercial lending terms.

A private equity firm is evaluating a potential leveraged buyout (LBO) of a mature industrial company with substantial real estate holdings but declining revenue growth. The target company's management team is divided on the optimal strategy for revitalizing the business. Considering this scenario, which LBO financing structure and operational turnaround plan would be most likely to maximize returns for the private equity firm while aligning the incentives of the management team and mitigating potential conflicts of interest?

Employing a sale-leaseback transaction to monetize the target company's real estate assets, using the proceeds to pay down debt and fund a special dividend to the private equity firm, ignoring long-term implications.

Structuring the LBO with a balanced mix of senior and subordinated debt, coupled with a significant equity contribution from the private equity firm, and implementing a long-term operational improvement plan focused on investing in new technologies, streamlining processes, and expanding into new markets, offering management performance-based equity incentives. (correct)

Negotiating a management buyout (MBO) transaction, granting the existing management team a significant equity stake in the new entity, while simultaneously providing them with autonomy over day-to-day operations and strategic decision-making, removing any need to incentivize the management team.

Structuring the LBO with a high proportion of senior secured debt and a minimal equity contribution, while simultaneously implementing aggressive cost-cutting measures and asset sales to maximize short-term cash flow, awarding management generous bonuses.

A sovereign wealth fund (SWF) is considering a long-term investment in a renewable energy infrastructure project located in a politically unstable region. The project's financial viability is contingent upon securing long-term power purchase agreements (PPAs) with creditworthy utilities. Given the inherent risks associated with the project's location and the uncertainty surrounding future energy policies, which risk mitigation and financing strategy would be most appropriate for the SWF to ensure the project's success and protect its investment?

<p>Utilizing a project finance structure, whereby the project's debt is non-recourse to the SWF and secured solely by the project's assets and cash flows, while simultaneously syndicating a portion of the debt to multilateral development banks (MDBs) to benefit from their preferential creditor status, thereby reducing the SWF's downside exposure. (B)</p> Signup and view all the answers

An insurance company is evaluating an investment in a portfolio of infrastructure assets, including toll roads, airports, and water utilities. These assets generate stable, long-term cash flows but are subject to various operational, regulatory, and environmental risks. How should the insurance company structure its investment and manage its asset-liability matching strategy to optimize its risk-adjusted returns while meeting its long-term obligations to policyholders?

<p>Investing in a diversified portfolio of privately held infrastructure funds, benefiting from the expertise of specialized asset managers, while simultaneously using interest rate swaps and inflation-linked bonds (Linkers) to match the duration and inflation sensitivity of its liabilities, decreasing risk. (D)</p> Signup and view all the answers

Flashcards

Financial decisions

Decisions made by companies regarding investments and financing methods.

Investment decisions

Choices about purchasing assets for business operations, often linked to capital budgeting.