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Question 1 Please note that answers to question 1 should be approximately 2 pages long, typed. Explain what is meant by the term “corporate governance”. Recently, a scandal involving Volkswagen was revealed. Based on your knowledge of corporate finance, critically assess what has happened to the value of Volkswagen since the emissions scandal was uncovered. Why do you believe the value has changed and what impact this might have on the corporate governance policies of Volkswagen going forward? How can Volkswagen mitigate the risk of events such as this one occurring in the future? (8 marks) Question 2 If a bond with a face value of €1,000 and a coupon rate of 7% is currently selling for €1,046, what does that tell you about the current yield to maturity of the bond relative to the bond’s coupon rate? Explain why this is the case. (4 marks) Question 3 Matt Berry owner of Berry Gold Mining, is evaluating a new gold mine in Tanzania. Meg Little, the company`s geologist, has just finished her analysis of the mine site. She has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Meg has taken an estimate of the gold deposits to Kevin Marshall, the company`s financial officer. Kevin has been asked by Matt to perform an analysis of the new mine and present his recommendation on whether the company should open the new mine. Kevin has used the estimates provided by Meg to determine the revenues that could be expected from the mine. He has also projected the expense of opening the mine, and the annual operating expenses. If the company opens the mine, it will cost £500 million today, and it will have a cash outflow of £80 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the following table. Berry Gold Mining has a 12 per cent required return on all of its gold mines. Year Cash flow (£) 0 -500,000,000 1 60,000,000 2 90,000,000 3 170,000,000 4 230,000,000 5 205,000,000 6 140,000,000 7 110,000,000 8 70,000,000 9 -80,000,000 Should this project be accepted? Use three investment evaluation techniques to arrive at your answer. Explain your recommendation fully. In analysing the mine, Kevin advises Matt that this mine is riskier than other mines in the Berry Gold Mining portfolio and so the discount rate should increase. What impact will this have on the cash flows of the project? (8 marks)
