BUSF_A01.qxd

Suggested answers to review questions

13.6The advantages of using a bank overdraft include:

lIt is relatively cheap.

lIt is flexible.

The disadvantages include:

lThe bank normally charges a fee for establishing the facility.

lThe overdraft is usually repayable at very short notice.

14.1Corporate restructuring means businesses reorganising themselves in some way or

another, in an attempt to meet their objectives more effectively. Thus, in principle, it

is a good thing. Whether it is always such a good thing in practice is another matter.

14.2As for any other investment, the shareholders should assess the present value of

future cash flows from the existing shares with the equivalent for the shares in the

‘bidder’. These cash flows may be difficult to predict, but this is true of all future

events.

14.3The general approach is that it is up to the private sector to organise itself as it sees

fit, unless the public interest is threatened. This threat may arise where a particular

merger creates an effective monopoly.

14.4In the former case, the managers who are doing the buying are not existing man-

agers in the business that is selling part of its operation. In the latter case, the man-

agers work for the business, usually in the part that is the subject of the sale.

14.5A sell-offinvolves a business selling part of its operation, perhaps to another busi-

ness, perhaps to the managers. A spin-offinvolves dividing the existing business’s

operations into two (or, possibly, more) parts by creating a new business (or busi-

nesses) to take responsibility for the spun-off part. Shareholders are given shares in

this new business (or businesses) in proportion to the shares that they already own

in the original one. Thus the shareholders own the same assets, but through two (or

more) separate shareholdings.

14.6The evidence on takeovers suggests that they are not necessarily successful.

15.1It is claimed that internationalisation has the potential simultaneously to increase

the quantity of profitable investments and lower the cost of finance.

15.2The four key players in foreign exchange markets are:

lthose who are involved in international trade who need to convert currencies;

lthose who prefer to convert to and hold a foreign currency because higher inter-

est rates are offered on deposits in that currency or because they expect the for-

eign currency to strengthen against their home currency;

lthose who speculate in currencies; and

lgovernments in an attempt to manage the exchange rate between their own and

other currencies.

15.3The four rules are:

lpurchasing power parity;

lFisher effect;

Chapter 14

Chapter 15

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