CORPORATE FINANCE (UKFF 3013)
JUNE 2022 TRIMESTER
TUTORIAL 2 (WEEK STARTING 20 JUN 2022)
THE FINANCE FUNCTION (CHAPTER 1)
R Berhad is a long-established petrochemical manufacturer, producing rare chemical products
in the east coast. The company’s products are marketed in USA, Europe and the Pacific
One of the company’s code of ethics is environmental responsibility. Last year, the company
was fined for an untreated discharge into a local river.
Over the years, the company’s share price has performed well. Now, there is concern that
price and cost competition from new entrants into the domestic market will have a significant
impact on the firm’s profitability and the dividends. R Berhad borrowed heavily to finance its
working capital requirements for local and overseas businesses. The management is
evaluating different foreign currency hedging methods to minimise its currency risk on the
payments to its overseas suppliers. The hedging methods that are available to R Berhad are
leading, lagging, forward and money markets.
The company is now considering expanding into other businesses through mergers or
acquisition. The finance director has proposed that the company acquire 100% of the equity of
D Berhad, an oil refinery company. The acquisition will be financed via a bond issue that will
not significantly impact upon the company’s existing credit rating and its capital structure. The
cost of capital is 7%.
A. Untreated discharge into a local river causes damage to environment. Environmental risk is
material to shareholder value. Discuss.
B. Agency conflicts may arise because of the differences in the interests of the owners and
managers. Explain the reasons for agency conflicts.
R Berhad was fined for an untreated discharge into a local river. This is considered as
environmental accident and the risk for the environmental damage is clearly material to
shareholder value and is likely to remain so while the company continues to manufacture
The shareholders will evaluate the extent and nature of the risk and assess whether the risk
profile of the business matches their own attitudes to or appetite for the environmental risk. In a
portfolio of shares, some investors will want to blend the environmental risks and returns, and
knowing about a company’s environmental risks is important in making these judgements.
The environmental risk information will allow the shareholders to judge how the risk might
affect the company’s value and hence the potential volatility and attractiveness of the share.
The penalty imposed on the company is capable of affecting returns, costs or both. When the
shareholders are aware of the environmental pollution and if the environmental risk is material,
the shareholders would have discounted the share price accordingly. The shareholders will
also evaluate the new risk controls put in place by the management because these measures
could be vital in restoring investor confidence. In particular, they should reassure shareholders
that the accident should not re-occur, or that if it were to re-occur, further controls would be in
place to offset the worst of the damage.