Extracts from the recent financial statements of Bold Co are given below.A factor has offe

第1题

Warden Co plans to buy a new machine. The cost of the machine, payable immediately, is $80

0,000 and the machine has an expected life of five years. Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced.

Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year.

Warden Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored.

Required:

(a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (7 marks)

(b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. (4 marks)

(c) (i) Explain briefly the meaning of the term ‘sensitivity analysis’ in the context of investment appraisal; (1 mark) (ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (6 marks)

(d) Discuss the nature and causes of the problem of capital rationing in the context of investment appraisal, and explain how this problem can be overcome in reaching the optimal investment decision for a company. (7 marks)

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第2题

(a) ZPS Co, whose home currency is the dollar, took out a fixed－interest peso bank loan se

(a) ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable. ZPS Co must pay interest of 5,000,000 pesos in six months’ time. The following information is available.

Required:

(i) Explain briefly the relationships between;

(1) exchange rates and interest rates;

(2) exchange rates and inflation rates. (5 marks)

(ii) Calculate whether a forward market hedge or a money market hedge should be used to hedge the interest payment of 5 million pesos in six months’ time. Assume that ZPS Co would need to borrow any cash it uses in hedging exchange rate risk. (6 marks)

(b) ZPS Co places monthly orders with a supplier for 10,000 components that are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which ZPS Co meets, and the cost per component is $7·50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1·00 per component per year.

The supplier has offered either a discount of 0·5% for payment in full within 30 days, or a discount of 3·6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2·20 per component per year due to the need for a larger storage facility.

Assume that there are 365 days in the year and that ZPS Co can borrow short-term at 4·5% per year.

Required:

(i) Discuss the factors that influence the formulation of working capital policy; (7 marks)

(ii) Calculate if ZPS Co will benefit financially by accepting the offer of:

(1) the early settlement discount;

(2) the bulk purchase discount. (7 marks)

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第3题

The following financial information relates to YNM Co, which has a cost of equity of 12%.

Assume that it is now 31 March 2011 and that the ordinary share price of YNM Co is $4·17 per share. YNM Co has been experiencing trading difficulties due to a continuing depressed level of economic activity:

Income statement information for recent years ending 31 March

Note: the statement of financial position takes no account of any dividend to be paid. The ordinary share capital of YNM Co has not changed during the period under consideration and the 8% bonds were issued in 1998.

Dividend and share price information

Financial objective of

YNM Co YNM Co has a declared objective of maximising shareholder wealth.

(1) To pay the same total cash dividend as in 2010

(2) To pay no dividend at all for the year ending 31 March 2011

Financing decision

YNM Co is also considering raising $50 million of new debt finance to support existing business operations.

Required:

(a) Analyse and discuss the recent financial performance and the current financial position of YNM Co, commenting on:

(i) achievement of the objective of maximising shareholder wealth;

(ii) the two dividend choices;

(iii) the proposal to raise $50 million of new debt finance. (13 marks)

(b) Discuss the following sources of finance that could be suitable for YNM Co, in its current position, to meet its need for $50m to support existing business operations:

(i) equity finance;

(ii) sale and leaseback. (6 marks)

(c) Explain the nature of a scrip (share) dividend and discuss the advantages and disadvantages to a company of using scrip dividends to reward shareholders. (6 marks)

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第4题

The finance director of AQR Co has heard that the market value of the company will increas

e if the weighted average cost of capital of the company is decreased. The company, which is listed on a stock exchange, has 100 million shares in issue and the current ex div ordinary share price is $2·50 per share. AQR Co also has in issue bonds with a book value of $60 million and their current ex interest market price is $104 per $100 bond. The current after-tax cost of debt of AQR Co is 7% and the tax rate is 30%.

The recent dividends per share of the company are as follows.

The finance director proposes to decrease the weighted average cost of capital of AQR Co, and hence increase its market value, by issuing $40 million of bonds at their par value of $100 per bond. These bonds would pay annual interest of 8% before tax and would be redeemed at a 5% premium to par after 10 years.

Required:

(a) Calculate the market value after-tax weighted average cost of capital of AQR Co in the following circumstances:

(i) before the new issue of bonds takes place;

(ii) after the new issue of bonds takes place. Comment on your findings. (12 marks)

(b) Identify and discuss briefly the factors that influence the market value of traded bonds. (5 marks)

(c) Discuss the director’s view that issuing traded bonds will decrease the weighted average cost of capital of AQR Co and thereby increase the market value of the company. (8 marks)

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第5题

BRT Co has developed a new confectionery line that can be sold for $5·00 per box and that

is expected to have continuing popularity for many years. The Finance Director has proposed that investment in the new product should be evaluated over a four-year time-horizon, even though sales would continue after the fourth year, on the grounds that cash flows after four years are too uncertain to be included in the evaluation. The variable and fixed costs (both in current price terms) will depend on sales volume, as follows.

The production equipment for the new confectionery line would cost $2 million and an additional initial investment of $750,000 would be needed for working capital. Capital allowances (tax-allowable depreciation) on a 25% reducing balance basis could be claimed on the cost of equipment. Profit tax of 30% per year will be payable one year in arrears. A balancing allowance would be claimed in the fourth year of operation.

The average general level of inflation is expected to be 3% per year and selling price, variable costs, fixed costs and working capital would all experience inflation of this level. BRT Co uses a nominal after-tax cost of capital of 12% to appraise new investment projects.

Required:

(a) Assuming that production only lasts for four years, calculate the net present value of investing in the new product using a nominal terms approach and advise on its financial acceptability (work to the nearest $1,000). (13 marks)

(b) Comment briefly on the proposal to use a four-year time horizon, and calculate and discuss a value that could be placed on after-tax cash flows arising after the fourth year of operation, using a perpetuity approach. Assume, for this part of the question only, that before-tax cash flows and profit tax are constant from year five onwards, and that capital allowances and working capital can be ignored. (5 marks)

(c) Discuss THREE ways of incorporating risk into the investment appraisal process. (7 marks)

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第6题

A shareholder of QSX Co is concerned about the recent performance of the company and has c

ollected the following fi nancial information.

One of the items discussed at a recent board meeting of QSX Co was the dividend payment for 2010. The fi nance director proposed that, in order to conserve cash within the company, no dividend would be paid in 2010, 2011 and 2012. It was expected that improved economic conditions at the end of this three-year period would make it possible to pay a dividend of 70c per share in 2013. The fi nance director expects that an annual dividend increase of 3% per year in subsequent years could be maintained.

The current cost of equity of QSX Co is 10% per year.

Assume that dividends are paid at the end of each year.

Required:

(a) Calculate the dividend yield, capital gain and total shareholder return for 2008 and 2009, and briefl y discuss your fi ndings with respect to:

(i) the returns predicted by the capital asset pricing model (CAPM);

(ii) the other fi nancial information provided. (10 marks)

(b) Calculate and comment on the share price of QSX Co using the dividend growth model in the following circumstances:

(i) based on the historical information provided;

(ii) if the proposed change in dividend policy is implemented. (7 marks)

(c) Discuss the relationship between investment decisions, dividend decisions and fi nancing decisions in the context of fi nancial management, illustrating your discussion with examples where appropriate. (8 marks)

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第7题

The following draft appraisal of a proposed investment project has been prepared for the f

i nance director of OKM Co by a trainee accountant. The project is consistent with the current business operations of OKM Co.

Net present value = 1,645,000 – 2,000,000 = ($355,000) so reject the project.

The following information was included with the draft investment appraisal:

1. The initial investment is $2 million

2. Selling price: $12/unit (current price terms), selling price infl ation is 5% per year

3. Variable cost: $7/unit (current price terms), variable cost infl ation is 4% per year

4. Fixed overhead costs: $500,000/year (current price terms), fi xed cost infl ation is 6% per year

5. $200,000/year of the fi xed costs are development costs that have already been incurred and are being recovered by an annual charge to the project

6. Investment fi nancing is by a $2 million loan at a fi xed interest rate of 10% per year

7. OKM Co can claim 25% reducing balance capital allowances on this investment and pays taxation one year in arrears at a rate of 30% per year

8. The scrap value of machinery at the end of the four-year project is $250,000

9. The real weighted average cost of capital of OKM Co is 7% per year

10. The general rate of infl ation is expected to be 4?7% per year

Required:

(a) Identify and comment on any errors in the investment appraisal prepared by the trainee accountant. (5 marks)

(b) Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability. (12 marks)

(c) Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:

(i) assets with replacement cycles of different lengths;

(ii) an investment project has several internal rates of return;

(iii) the business risk of an investment project is signifi cantly different from the business risk of current operations. (8 marks)

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第8题

YGV Co is a listed company selling computer software. Its profi t before interest and tax

has fallen from $5 million to $1 million in the last year and its current fi nancial position is as follows:

YGV Co has been advised by its bank that the current overdraft limit of $4?5 million will be reduced to $500,000 in two months’ time. The fi nance director of YGV Co has been unable to fi nd another bank willing to offer alternative overdraft facilities and is planning to issue bonds on the stock market in order to fi nance the reduction of the overdraft. The bonds would be issued at their par value of $100 per bond and would pay interest of 9% per year, payable at the end of each year. The bonds would be redeemable at a 10% premium to their par value after 10 years. The fi nance director hopes to raise $4 million from the bond issue.

The ordinary shares of YGV Co have a par value of $1?00 per share and a current market value of $4?10 per share. The cost of equity of YGV Co is 12% per year and the current interest rate on the overdraft is 5% per year. Taxation is at an annual rate of 30%.

Other fi nancial information:

Average gearing of sector (debt/equity, market value basis): 10%

Average interest coverage ratio of sector: 8 times

Required:

(a) Calculate the after–tax cost of debt of the 9% bonds. (4 marks)

(b) Calculate and comment on the effect of the bond issue on the weighted average cost of capital of YGV Co, clearly stating any assumptions that you make. (5 marks)

(c) Calculate the effect of using the bond issue to fi nance the reduction in the overdraft on: (i) the interest coverage ratio; (ii) gearing. (4 marks)

(d) Evaluate the proposal to use the bond issue to fi nance the reduction in the overdraft and discuss alternative sources of fi nance that could be considered by YGV Co, given its current fi nancial position. (12 marks)

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第9题

ZSE Co is concerned about exceeding its overdraft limit of $2 million in the next two peri

ods. It has been experiencing considerable volatility in cash fl ows in recent periods because of trading diffi culties experienced by its customers, who have often settled their accounts after the agreed credit period of 60 days. ZSE has also experienced an increase in bad debts due to a small number of customers going into liquidation.

The company has prepared the following forecasts of net cash fl ows for the next two periods, together with their associated probabilities, in an attempt to anticipate liquidity and fi nancing problems. These probabilities have been produced by a computer model which simulates a number of possible future economic scenarios. The computer model has been built with the aid of a fi rm of fi nancial consultants.

Required:

(a) Calculate the following values:

(i) the expected value of the period 1 closing balance;

(ii) the expected value of the period 2 closing balance;

(iii) the probability of a negative cash balance at the end of period 2;

(iv) the probability of exceeding the overdraft limit at the end of period 2.

Discuss whether the above analysis can assist the company in managing its cash fl ows. (13 marks)

(b) Identify and discuss the factors to be considered in formulating a trade receivables management policy for ZSE Co. (8 marks)

(c) Discuss whether profi tability or liquidity is the primary objective of working capital management. (4 marks)

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第10题

JJG Co is planning to raise $15 million of new finance for a major expansion of existing b

usiness and is considering a rights issue, a placing or an issue of bonds. The corporate objectives of JJG Co, as stated in its Annual Report, are to maximise the wealth of its shareholders and to achieve continuous growth in earnings per share. Recent financial information on JJG Co is as follows:

Required:

(a) Evaluate the financial performance of JJG Co, and analyse and discuss the extent to which the company has achieved its stated corporate objectives of:

(i) maximising the wealth of its shareholders;

(ii) achieving continuous growth in earnings per share.

Note: up to 7 marks are available for financial analysis.(12 marks)

(b) If the new finance is raised via a rights issue at $7·50 per share and the major expansion of business has

not yet begun, calculate and comment on the effect of the rights issue on:

(i) the share price of JJG Co;

(ii) the earnings per share of the company; and

(iii) the debt/equity ratio. (6 marks)

(c) Analyse and discuss the relative merits of a rights issue, a placing and an issue of bonds as ways of raising the finance for the expansion. (7 marks)

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