Corporate Finance

 Chapter-10 &11
Theory:
Q-1: Whatare the problems with payback period?

Q-2: List the key attributes of NPV.

Q-3: What do you mean by capital budgeting? Explain the importance of capital budgeting?

Q-4: State the practical utility of capital budgeting?

Q-5: Justify the superiority of NPV over the IRR.

Q-6: Does the assumption concerning the reinvestment of intermediate cash inflow tend to
favor NPV or IRR? In practice, which techniques is preferred and why?

Numerical Problem: Chapter-10

Q-1: Choosing between two projects with acceptable payback periods Shell Camping
Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment
of TK.100,000. John Shell, president of the company, has set a maximum payback period of
4 years. The after-tax cash inflows associated with each project are as follows:

Year Cash inflows (CFt )

Project A Project B
1 TK. 10000 Tk.40000
2 20000 30000
3 30000 20000
4 40000 10000
5 20000 20000
Requirement:
a. Determine the payback period of each project.
b. Because they are mutually exclusive, Shell must choose one. Which should the company
invest in?
c. Explain why one of the projects is a better choice than the other.

Q-2: NPV—mutually exclusive projects Hook Industries is considering the replacement

of one of its old drill presses. Three alternative replacement presses are under consideration.
The relevant cash flows associated with each are shown in the following table. The firm’s
cost of capital is 15%.
Press A Press B Press C
Initial Investment (Cfo) TK. 85000 TK. 60000 TK. 130000
Year (t) Cash inflows (CFt)
1 TK. 18000 TK. 12000 TK. 50000
2 18000 14000 30000

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 1
 3 18000 16000 20000
4 18000 18000 20000
5 18000 20000 20000
6 18000 25000 30000
7 18000 - 40000
8 18000 - 50000

Requirement:
a. Calculate the net present value (NPV) of each press.
b. Using NPV, evaluate the acceptability of each press.
c. Rank the presses from best to worst using NPV.

Q-3: Payback and NPV Neil Corporation has three projects under consideration. The cash
flows for each of them are shown in the following table. The firm has a 16% cost of capital.
Project A Project B Project C
Initial Investment (Cfo) TK. 40000 TK. 40000 TK. 40000
Year (t) Cash inflows (CFt)
1 TK. 13000 TK. 7000 TK. 19000
2 13000 10000 16000
3 13000 13000 13000
4 13000 16000 10000
5 13000 19000 7000
Requirement:
a. Calculate each project’s payback period. Which project is preferred according to this
method?
b. Calculate each project’s net present value (NPV). Which project is preferred according to
this method?
c. Comment on your findings in parts a and b, and recommend the best project. Explain your
recommendation.

Q-4: NPV and IRR Benson Designs has prepared the following estimates for a long-term
project it is considering. The initial investment is TK.18,250, and the project is expected to
yield after-tax cash inflows of TK.4,000 per year for 7 years. The firm has a 10% cost of
capital.
Requirement:
a. Determine the net present value (NPV) for the project.
b. Determine the internal rate of return (IRR) for the project.
c. Would you recommend that the firm accept or reject the project? Explain your answer.

Q-5: All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering
two mutually exclusive projects, each with an initial investment of TK.150,000. The
company’s board of directors has set a 4-year payback requirement and has set its cost of
capital at 9%. The cash inflows associated with the two projects are as follows:
Year Cash inflows (CFt )
Project A Project B
1 TK. 45000 Tk.75000
2 45000 60000
3 45000 30000
4 45000 30000

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 2
 5 45000 30000
6 45000 30000
Requirement:
a. Calculate the payback period for each project.
b. Calculate the NPV of each project at 0%.
c. Calculate the NPV of each project at 9%.
d. Derive the IRR of each project.
e. Rank the projects by each of the techniques used. Make and justify a recommendation.

Numerical Problem: Chapter-11

Q-1: Breakeven cash inflows Etsitty Arts, Inc., a leading producer of fine cast silver
jewelry, is considering the purchase of new casting equipment that will allow it to expand the
product line into award plaques. The proposed initial investment is TK.35,000. The company
expects that the equipment will produce steady income throughout its 12-year life.
Requirement:
a. If Etsitty requires a 14% return on its investment, what minimum yearly cash
inflow will be necessary for the company to go forward with this project?
b. How would the minimum yearly cash inflow change if the company required
a 10% return on its investment?
Q-2: Breakeven cash inflows and risk Pueblo Enterprises is considering investing in either
of two mutually exclusive projects, X and Y. Project X requires an initial investment of
TK.30,000; project Y requires TK.40,000. Each project’s cash inflows are 5-year annuities;
project X’s inflows are TK.10,000 per year; project Y’s are TK.15,000. The firm has
unlimited funds and, in the absence of risk differences, accepts the project with the highest
NPV. The cost of capital is 15%.
Requirement:
a. Find the NPV for each project. Are the projects acceptable?
b. Find the breakeven cash inflow for each project.
c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the
two projects, as shown in the following table. What is the probability that each project will
achieve the breakeven cash inflow found in part b?

Probability of achieving cash inflow

Range of cash inflow in given range
Projece X Project Y
Tk.0 to Tk. 5000 0% 5%
Tk.5000 to Tk.7500 10% 10%
Tk.7500 to Tk.10000 60% 15%
Tk.10000 to Tk.12500 25% 25%
Tk.12500 to Tk.15000 5% 20%
Tk. 15000 to Tk.20000 0% 15%
Above TK. 20000 0% 10%

d. Which project is more risky? Which project has the potentially higher NPV? Discuss the
risk-return tradeoffs of the two projects.
e. If the firm wished to minimize losses (that is, NPV<TK.0), which project would you
recommend? Which would you recommend if the goal, instead, was achieving the higher
NPV?

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 3
Q-3: Basic sensitivity analysis Murdock Paints is in the process of evaluating two mutually
exclusive additions to its processing capacity. The firm’s financial analysts have developed
pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with
each project. These estimates are shown in the following table.

Project A Project B
Initial Investment (Cfo) TK. 8000 TK. 8000
Outcome Annual Cash Inflows (CF)
Pessimistic Tk. 200 TK. 900
Most likely 1000 1000
Optimistic 1800 1100

Requirement:
a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm’s cost of capital is 10% and that both projects have 20- year lives.
Construct a table similar to this for the NPVs for each project. Include the range of NPVs for
each project.
c. Do parts a and b provide consistent views of the two projects? Explain.
d. Which project do you recommend? Why?

Q-4: Sensitivity analysis James Secretarial Services is considering the purchase of one of
two new personal computers, P and Q. Both are expected to provide benefits over a 10-year
period, and each has a required investment of TK.3,000. The firm uses a 10% cost of capital.
Management has constructed the following table of estimates of annual cash inflows for
pessimistic, most likely, and optimistic results.
Computer P Computer Q
Initial Investment (Cfo) TK. 3000 TK. 3000
Outcome Annual Cash Inflows (CF)
Pessimistic Tk. 500 TK. 400
Most likely 750 750
Optimistic 1000 1200

Requirement:
a. Determine the range of annual cash inflows for each of the two computers.
b. Construct a table similar to this for the NPVs associated with each outcome for both
computers.
c. Find the range of NPVs, and subjectively compare the risks associated with purchasing
these computers.

Q-5: Risk-adjusted discount rates—Tabular After a careful evaluation of investment

alternatives and opportunities, Masters School Supplies has developed a CAPM type
relationship linking a risk index to the required return (RADR), as shown in the following
table.
Risk Index Required return(RADR)
0.0 7.0% (Risk-free rate, Rf)
0.2 8.0
0.4 9.0
0.6 10.0

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 4
 0.8 11.0
1.0 12.0
1.2 13.0
1.4 14.0
1.6 15.0
1.8 16.0
2.0 17.0
The firm is considering two mutually exclusive projects, A and B. The following are the data
the firm has been able to gather about the projects.

Project A Project B
Initial Investment (Cfo) TK. 20000 TK.30000
Project life 5 Years 5 Years
Annual cash inflow(CF) TK. 7000 TK.10000
Risk index 0.2 1.4
All the firm’s cash inflows have already been adjusted for taxes.
Requirement:
a. Evaluate the projects using risk-adjusted discount rates.
b. Discuss your findings in part a, and recommend the preferred project.

Q-6: Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering
two mutually exclusive investments. The company wishes to use a risk adjusted rate of return
in its analysis. Centennial’s cost of capital (similar to the market return in CAPM) is 12%,
and the current risk-free rate of return is 7%. Cash flows associated with the two projects are
as follows:
Project X Project Y
Initial Investment (Cfo) TK. 70000 TK. 78000
Year (t) Cash inflows (CFt)
1 Tk. 30000 TK. 22000
2 Tk. 30000 Tk. 32000
3 Tk. 30000 Tk. 38000
4 Tk. 30000 Tk. 46000
Requirement:
a. Use a risk-adjusted rate of return approach to calculate the net present value of each
project, given that Project X has a RADR factor of 1.20 and Project Y has a RADR factor of
1.40. The RADR factors are similar to project betas. (Use Equation 10.5 to calculate the
required project return for each.)
b. Discuss your findings in part a, and recommend the preferred project.

Q-7:Risk classes and RADR Moses Manufacturing is attempting to select the best of three
mutually exclusive projects, X, Y, and Z. Though all the projects have 5-year lives, they
possess differing degrees of risk. Project X is in class V, the highest-risk class; project Y is in
class II, the below-average-risk class; and project Z is in class III, the average-risk class. The
basic cash flow data for each project and the risk classes and risk-adjusted discount rates
(RADRs) used by the firm are shown in the following tables.

Project X Project Y Project Z

Initial Investment (Cfo) TK. 180000 TK. 235000 Tk. 310000

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 5
 Year (t) Cash inflows (CFt)
1 Tk. 80000 TK. 50000 TK. 90000
2 Tk. 70000 Tk. 60000 TK. 90000
3 Tk. 60000 Tk. 70000 TK. 90000
4 Tk. 60000 Tk. 80000 TK. 90000
5 Tk. 60000 TK. 90000 TK. 90000

Risk Classes and RADRs

Risk Class Description Risk-adjusted
discount rate (RADR)
I Lowest risk 10%
II Below-average risk 13
III Average risk 15
IV Above-average risk 19
V Highest risk 22
Requirement:
a. Find the risk-adjusted NPV for each project.
b. Which project, if any, would you recommend that the firm undertake?

 Chapter 12
Theory:

Q-1: Describe how each of the following behavioral approaches can be used to deal with
project risk: (i) scenario analysis and (ii) simulation.

Q-2: What is capital rationing? Why does it frequently occur in practice?

Q-3: What do you mean by Monte Carlo Simulation? How does it differ from sensitivity
analysis? Explain.

 Chapter 13
Theory:

Q-1: What are business risk and financial risk? How does each of them influence the firm's
capital structure decisions?

Q-2: How does asymmetric information affect the firm's capital structure decisions?

Q-3: What important factors in addition to quantitative factors should a firm consider when it
is making a capital structure decisions?

Q-4: What is capital structure and optimum capital structure?

Q-5: What are the assumptions of capital structure theory analysis?

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 6
Q-6: Define relevancy theory and irrelevancy theory of capital structure and proof the
relevancy theory of capital structure by imaginary figures.

Q-7: State the conclusions when we add bankruptcy cost in our capital structure theory
analysis.

Numerical problems:

Q-1: NNN Company has collected the following data with respect to its capital structure,
expected earnings per share, and required return.

Capital structure debt Expected earnings per Required return (ks)

ratio share
0% Tk.3.12 13%
10% Tk.3.90 15%
20% Tk.4.80 16%
30% Tk.5.44 17%
40% Tk.5.51 19%
50% Tk.5.00 20%
60% Tk.4.40 22%
Required:

i. Compute the estimated share value associated with each of the capital structures.
ii. Determine the optimal capital structure on the basis of (1) maximization of
expected earnings per share and (2) maximization of share value.
iii. Which capital structure do you recommend? Why?

 Chapter: 14
Theory:
Q-1: What factors do firms consider in establishing dividend policy? Briefly describe each of
them.

Or, briefly describe the factors of dividend policy.

Or, what are the six factors that affect dividend policy?

Q-2: Why do firms issue stock dividends? Comment on the following statement: “I have a
stock that promises to pay a 20% stock dividend every year and therefore it guarantees that
will break even in five years.”

Q-3: Explain stock splits and stock repurchases and the firm’s motivation for undertaking
each of them.

Q-4: Compare a stock split with a stock dividend.

Q-5: What is the logic behind repurchasing shares of Common stock to distribute excess cash
to the firm's Owners?
Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 7
Q-6: Contrast to the basic arguments about dividend policy advanced by Miller and
Modigliani (M&M) and by Gordon and Linter.

Numerical Problem:

Q-1: Macro Soft Corporation is considering a 3-for-2 stock split. It currently has the
stockholders’ equity position shown. The current stock price is TK.120.00 per share. The
most recent periods, earnings available for common stock are included in retained earnings.

Preferred stock TK.1,000,000

Common stock (100,000 shares at TK.3 par) 300,000
Paid in capital in excess of par 1,700,000
Retained earnings 10,000,000
Total stockholders' equity TK.13,000,000
Requirement:
I. What effects on Macro soft would result from stock split?
II. What change in stock price would you expect to result from the stock split?
III. What is the maximum cash dividend per share that firm could pay on common stock
before and after the stock split?
IV. Contrast your answer to part (i) through (iii) with the circumstances surrounding a
50% stock dividend.
Q-2: The following financial data on the bond recording company are available:

Earnings available for common stockholders TK.800,000

Number of shares of common stock outstanding 400,000
Earnings per share (TK.800,000/400,000) TK.2
Market price per share TK.20
Price/Earnings(P/E) Ratio (TK.20 TK.2) 10
The firm is currently considering whether it should use TK.400,000 of its earnings to pay
cash dividends of TK.1.00 per share or to repurchase stock at TK.21.00 per share.
Requirement:
i. Approximately how many shares of stock can the firm repurchase at the Tk.21.00 per
share price, using the funds that would have gone to pay the cash dividend?
ii. Calculate the EPS after the repurchase. Explain your calculations.
iii. If the stock still sells at 10 times earnings, what will the market price be after the
repurchase?
iv. Compare the pre and post repurchase earnings per share.
v. Compare and contrast the stockholders' positions under the dividend and repurchase
alternatives. What are the tax implications under each alternative?

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 8
  Chapter 15
Theory:
Q-1: What is net working capital? How are net working capital, liquidity and risk of technical
insolvency related?
Q-2: The main focus of working capital management is to maintain balance between
4profitability and liquidity.” Explain.
Q-3: What are the working capital policies? How should financing be done according to
those 3policies?
Q-4: Why is it important for a firm to minimize the length of its cash conversion cycle?
Q-5: Why should a firm actively monitor the accounts receivable of its credit customers?
How are the average collection period and an aging schedule used for credit monitoring?
Q-6: What is the difference between the firms’ operating cycle and its cash conversion cycle?
Q-7: Explain the concept of working capital and state the advantage and disadvantage of
excessive working capital.
Q-8: What so you mean by cash management? Explain why people hold cash.
Numerical Problem:
Q-1: Garrett Industries turns over its inventory six times each year; it has an average
collection period of 45 days and an average payment period of 30 days. The firm's annual
sales are Tk.3million. Assume there is no difference in the investment per taka of sales in
inventory, receivables, and payables; and assume a 360-day year.
Instructions:
I. Calculate the firm's cash conversion cycle, its daily cash operating expenditures, and
the amount of resources needed to support its cash conversion cycle.
II. Find the firm's cash conversion cycle and resource investment requirement if it makes
the following changes simultaneously.
1. Shortens the average age of inventory by 5 days.
2. Speeds the collection of accounts receivable by an average of 10days.
3. Extends the average payment period by 10 days.
III. If the firm pays 14% for its resource investment, by how much, if anything, could it
increase its annual profit as a result of the changes in part(ii)?
IV. if the annual cost of achieving the profit in part (iii) is Tk.25,000,what action would
you recommend to the firm? Why?

Q-2: Parker Tool is considering lengthening its credit period from 30 to 60 days. All
customers will continue to pay on the net date. The firm currently bills $450,000 for sales and
has $345,000 in variable costs. The change in credit terms is expected to increase sales to
$510,000.Bad-debt expenses will increase from 1% to 1.5% of sales. The firm has a required
rate of return on equal-risk investments of 20%. (Note: Assume a 365-day year.)

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 9
Instructions:
i. What additional profit contribution from sales will be realized from the proposed change?
ii. What is the cost of the marginal investment in accounts receivable?
iii. What is the cost of the marginal bad debts?
iv. Do you recommend this change in credit terms? Why or why not?

 Chapter 17
Theory:

Q-1: Explain sale and lease back arrangement.

Q-2: Define lease. List the criteria for classifying lease as a finance lease.

Q-3: Warrant and convertible is marketing feature. Explain this statement with example.

Q-4: What is an option? Define calls and puts. What role, if any, does call and put options
play in the fund raising activities of the financial manager?
Q-5:. Differentiate between a hybrid security and a derivative security. How does their use by
the corporation differ?
Q-6: Explain the key characteristics of stock purchase warrants, the implied price of an
attached warrant, and the value of warrants.

Numerical Problem:
Q-1:Yamuna is considering buying 100 shares of Sooner Products Inc. at TK.62 per share.
Because she has read that the firm will probably soon receive certain large orders from
abroad, she expects the price of Sooner to increase to TK.70 per share. As an alternative,
Yamuna is considering purchase of a call option for 100shares of Sooner at a strike price of
TK.60. The 90-day option will cost TK.600. Ignore any brokerage fees or dividends.
Requirement:
a. What will Yamuna’s profit be on the stock transaction if its price does rise to Tk.70 and
she sells?
b. How much will Yamuna’s earn on the option transaction if the underlying stock price rises
to Tk.70?
c. How high must the stock price rise for Yamuna’s to break even on the option transaction?
d. Compare, contrast, and discuss the relative profit and risk associated with the stock and the
option transactions.

Q-2: During the past 2 years Shankar Industries issued three separate convertible bonds. For
each of them, calculate the conversion price.
a. A TK.1,000 par value that is convertible into 10 shares of common stock.
b. A TK.2,000 par value that is convertible into 20 shares of common stock.
c. A TK.1,500 par value that is convertible into 30 shares of common stock
.
Q-3: The Meat Bagel Shop wishes to evaluate two plans for financing an oven: leasing and
borrowing to purchase. The firm is in the 30% tax bracket.

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 10
Lease: The shop can lease the oven under a 5-year lease requiring annual end-of-year
payments of TK.6,000. All maintenance costs will be paid by the lessor, and insurance and
other costs will be borne by the lessor. The lessee will exercise its option to purchase the
asset for TK.5,000 at termination of the lease.

Purchase: The oven costs TK.30,000 and will have a 5-year life. It will be depreciated under
straight line method. The total purchase price will be financed by a 5-year, 12% loan
requiring equal annual end-of-year payment. The firm will pay Tk.1,000 per year for a
service contract that covers all maintenance costs; insurance and other costs will be borne by
the firm.

a. For the leasing plan, calculate the following:

1. The after-tax cash outflow each year.
2. The present value of the cash outflows, using a 8% discount rate.
b. For the purchasing plan, calculate the following:
1. The annual interest expense deductible for tax purposes for each of the5 years.
2. The after-tax cash outflow resulting from the purchase for each of the5 years.
3. The present value of the cash outflows, using a 8% discount rate.
c) Advice the company which alternative is good for the company and why?

Q-4: A 6 month call option on 100 shares of SRS Corp. stock is selling for Tk.300. The
striking price for the option is Tk.40. The stock is currently selling at Tk.38 per share.
Ignoring brokerage fees and what price must the stock achieve to just cover the expense of
the option? If the stock price rises to Tk.45,what will the net profit on the option contract be?
Q-5: David Jackson can invest Tk.6,300 in the common stock or the warrants of Hamilton
Life Insurance. The common stock is currently selling for Tk.30 per share. Its warrants,
which provide for the purchase of two shares of common stock at Tk.28 per share, are
currently selling for Tk.7. The stock is expected to rise to a market price of Tk.32 within the
next year, so the expected theoretical value of a warrant over the next year is Tk.8. The
expiration date of the warrant is 1 year from the present.
Requirement:
i. If Mr. Jackson purchases the stock, holds it for 1 year, and then sells it for Tk.32, what is
his total gain? (Ignore brokerage fees and taxes.)
ii. If Mr. Jackson purchases the warrants and converts them to common stock in 1 year, what
is his total gain if the market price of common shares is actually Tk.32? (Ignore brokerage
fees and taxes.)
iii Repeat parts i) and ii), assuming that the market price of the stock in 1 year is 1) Tk.30 and
2) Tk.28.
iv. Discuss the two alternatives and the tradeoffs associated with them.
Q-6:Western Company has an outstanding issue of convertible bonds with a Tk.1,000 par
value. These bonds are convertible into 50 shares of common stock. They have an 10% t
annual coupon interest rate and a 20 year maturity. The interest rate on a straight bond of
similar risk is currently 12%.
Required:
i. Calculate the straight bond value of the bond.

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 11
ii. Calculate the conversion (or stock) values of the bond when the market price of the
common stock is Tk.15, Tk.20, Tk.23, Tk.30 and Tk.45 per share.
iii. For each the stock prices given in part ii, at what price would you expect the bond to sell?
Why?
iv. What is the least you would expect the bond to sell for, regardless of the common stock
price behavior?
 Chapter-18
Theory:
Q-1: Briefly describe each of the following takeover defenses against a hostile merger:
a) White knight, b) 3 poison pill, and c) leveraged recapitalization
Q-2: Define merger. Briefly describe the different types of mergers and motives for merging.
Q-3: Synergy is often considered before a merger. How does synergy result in merger?
Explain.
Q-4: Briefly describe each of the following types of mergers: i) horizontal, ii) vertical, iii)
congeneric and iv) conglomerate.
Q-5:What is the ratio of exchange? Is it based on the current market prices of the shares of
the acquiring and target firms?

Numerical Problem:
Q-1: AAA Foods is contemplating acquisition of BBB Company for a cash price of
TK.18,00,000. AAA currently has high financial leverage and therefore has a cost of capital
of 14%. As a result of acquiring BBB, which is financed entirely with equity, the firm
expects its financial leverage to be reduced and its cost of capital to drop to 11%. The
acquisition of BBB is expected to increase AAA’s cash inflows by TK.2,00,000 per year for
the first 3 years and by Tk. 300,000 per year for the following 12 years.

Required:
a. Determine whether the proposed cash acquisition is desirable. Explain your answer.
b. If the firm’s financial leverage would actually remain unchanged as a result of the
proposed acquisition, would this alter your recommendation in part a? Support your answer
with numerical data.

Q-2: At the end of 2016, Lake Industries had 80,000 shares of common stock outstanding
and had earnings available for common shareholders of TK.160,000. Butler Company, at the
end of 2016, had 10,000 shares of common stock outstanding and had earned TK.20,000 for
common shareholders. Lake’s earnings are expected to grow at an annual rate of 5%, and
Butler’s growth rate in earnings should be 10% per year.

Required:
a. Calculate earnings per share (EPS) for Lake Industries for each of the next5 years (2017–
2021), assuming there is no merger.
b. Calculate the next 5 years’ (2017–2021) earnings per share (EPS) for Lake if it acquires
Butler at a ratio of exchange of 1.1.
c. Compare your findings in parts a and b, and explain why the merger looks attractive when
viewed over the long run.

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 12
 Question Pattern
Question No Chapter
1 Chapter 10+11
2 Chapter 12+13
3 Chapter 14
4 Chapter 15
5 Chapter 17
6 Chapter 18

Dr. A.N.M. Asaduzzaman Fakir (Principles of Managerial Finance, Gitman L.J. 15 th Ed.) Page 13