Question

Corporate Finance

For each 5 part question, please read the argument carefully and discuss why you agree or disagree with it. You must assess the argument itself rather than other information such as occupations of speakers. True or False question.

part 1)

Your friend, Bob, says ” The current gold price is $8 per ounce and the one-year forward gold price is $9 per ounce. If you buy gold now and sell the same amount of one year gold forward contract, you can earn profits by $1 per ounce surely. You have to invest in these transactions.” Do you agree with Bob? Explain why.

part 2)

part 3)

part 4)

part 5)

Answer 1

1. Disagree

because of the futures are trading at $ 9 doesn't mean that it will surely be trading at $9 a year later and this depends on the market forces.So we cannot be 100% sure that we will have profits of $ 1.

2. Disagree.

The CFO is not right as the reduced cash in the balance sheet will make the firm vulnerable if any recession comes.

Moreover the reduction of cash won't have any effects on the net working capital.

3.agree.

because of the fact that our debts are risk free we shall have to pay the same amount as interest over a period of time and no changes in it. Thus the tax benefit that we will have shall also be same and not prone to any market changes.

4. Agree

Because the stock has declined to 95 % we can say that the deal had no operating synergies that's why the market has not shown any interest in the stock. However we need to see that the consideration of the deal was paid by shares or cash that might also impact the share price.

5. agreee.

The CFO has the right approach to encash the market opportunity. The callable bonds will give the investors extra return and also the cushion to the company if the Fed lowers the interest rates.