The current assets and current liabilities of CSZ Co at the end of March 2014 are as follo

第1题

The Board of OAP Co has decided to limit investment funds to $10 million for the next year

and is preparing its capital budget. The company is considering five projects, as follows:

All five projects have a project life of four years. Projects A, B, C and D are divisible, and Projects B and D are mutually exclusive. All net present values are in nominal, after-tax terms.

Project E

This is a strategically important project which the Board of OAP Co have decided must be undertaken in order for the company to remain competitive, regardless of its financial acceptability. Information relating to the future cash flows of this project is as follows:

These forecasts are before taking account of selling price inflation of 5·0% per year, variable cost inflation of 6·0% per year and fixed cost inflation of 3·5% per year. The fixed costs are incremental fixed costs which are associated with Project E. At the end of four years, machinery from the project will be sold for scrap with a value of $400,000. Tax allowable depreciation on the initial investment cost of Project E is available on a 25% reducing balance basis and OAP Co pays corporation tax of 28% per year, one year in arrears. A balancing charge or allowance is available at the end of the fourth year of operation.

OAP Co has a nominal after-tax cost of capital of 13% per year.

Required:

(a) Calculate the nominal after-tax net present value of Project E and comment on the financial acceptability of this project. (14 marks)

(b) Calculate the maximum net present value which can be obtained from investing the fund of $10 million, assuming here that the nominal after-tax NPV of Project E is zero. (5 marks)

(c) Discuss the reasons why the Board of OAP Co may have decided to limit investment funds for the next year. (6 marks)

点击查看答案

第2题

GWW Co is a listed company which is seen as a potential target for acquisition by financia

l analysts. The value of the company has therefore been a matter of public debate in recent weeks and the following financial information is available:

The shares of GWW Co have a nominal (par) value of 50c per share and a market value of $4·00 per share. The cost of equity of the company is 9% per year. The business sector of GWW Co has an average price/earnings ratio of 17 times. The 8% bonds are redeemable at nominal (par) value of $100 per bond in seven years’ time and the before-tax cost of debt of GWW Co is 6% per year.

The expected net realisable values of the non-current assets and the inventory are $86·0m and $4·2m, respectively. In the event of liquidation, only 80% of the trade receivables are expected to be collectible.

Required:

(a) Calculate the value of GWW Co using the following methods:

(i) market capitalisation (equity market value);

(ii) net asset value (liquidation basis);

(iii) price/earnings ratio method using the business sector average price/earnings ratio;

(iv) dividend growth model using:

(1) the average historic dividend growth rate;

The total marks will be split equally between each part. (10 marks)

(b) Discuss the relative merits of the valuation methods in part (a) above in determining a purchase price for GWW Co.

(c) Calculate the following values for GWW Co:

(i) the before-tax market value of the bonds of GWW Co;

(ii) debt/equity ratio (book value basis);

(iii) debt/equity ratio (market value basis).

Discuss the usefulness of the debt/equity ratio in assessing the financial risk of GWW Co.

The total marks will be split equally between each part. (7 marks)

点击查看答案

第3题

The statement of financial position of BKB Co provides the following information:BKB Co ha

The statement of financial position of BKB Co provides the following information:

BKB Co has an equity beta of 1·2 and the ex-dividend market value of the company’s equity is $125 million. The ex-interest market value of the convertible bonds is $21 million and the ex-dividend market value of the preference shares is $6·25 million.

The convertible bonds of BKB Co have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years’ time. The current ordinary share price of BKB Co is expected to increase by 4% per year for the foreseeable future.

The overdraft has a variable interest rate which is currently 6% per year and BKB Co expects this to increase in the near future. The overdraft has not changed in size over the last financial year, although one year ago the overdraft interest rate was 4% per year. The company’s bank will not allow the overdraft to increase from its current level.

The equity risk premium is 5% per year and the risk-free rate of return is 4% per year. BKB Co pays profit tax at an annual rate of 30% per year.

Required:

(a) Calculate the market value after-tax weighted average cost of capital of BKB Co, explaining clearly any assumptions you make. (12 marks)

(b) Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions. (4 marks)

(c) Comment on the interest rate risk faced by BKB Co and discuss briefly how this risk can be managed. (5 marks)

(d) Discuss the attractions to a company of convertible debt compared to a bank loan of a similar maturity as a source of finance. (4 marks)

点击查看答案

第4题

KXP Co is an e－business which trades solely over the internet. In the last year the compan

KXP Co is an e-business which trades solely over the internet. In the last year the company had sales of $15 million. All sales were on 30 days’ credit to commercial customers.

Extracts from the company’s most recent statement of financial position relating to working capital are as follows:

In order to encourage customers to pay on time, KXP Co proposes introducing an early settlement discount of 1% for payment within 30 days, while increasing its normal credit period to 45 days. It is expected that, on average, 50% of customers will take the discount and pay within 30 days, 30% of customers will pay after 45 days, and 20% of customers will not change their current paying behaviour.

KXP Co currently orders 15,000 units per month of Product Z, demand for which is constant. There is only one supplier of Product Z and the cost of Product Z purchases over the last year was $540,000. The supplier has offered a 2% discount for orders of Product Z of 30,000 units or more. Each order costs KXP Co $150 to place and the holding cost is 24 cents per unit per year.

KXP Co has an overdraft facility charging interest of 6% per year.

Required:

(a) Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on your findings. (6 marks)

(b) Calculate whether the bulk purchase discount offered by the supplier is financially acceptable and comment on the assumptions made by your calculation. (6 marks)

(c) Identify and discuss the factors to be considered in determining the optimum level of cash to be held by a company. (5 marks)

(d) Discuss the factors to be considered in formulating a trade receivables management policy. (8 marks)

点击查看答案

第5题

BQK Co, a house－building company, plans to build 100 houses on a development site over the

BQK Co, a house-building company, plans to build 100 houses on a development site over the next four years. The purchase cost of the development site is $4,000,000, payable at the start of the first year of construction. Two types of house will be built, with annual sales of each house expected to be as follows:

Houses are built in the year of sale. Each customer finances the purchase of a home by taking out a long-term personal loan from their bank. Financial information relating to each type of house is as follows:

Selling prices and variable cost of construction are in current price terms, before allowing for selling price inflation of 3% per year and variable cost of construction inflation of 4·5% per year.

Fixed infrastructure costs of $1,500,000 per year in current price terms would be incurred. These would not relate to any specific house, but would be for the provision of new roads, gardens, drainage and utilities. Infrastructure cost inflation is expected to be 2% per year.

BQK Co pays profit tax one year in arrears at an annual rate of 30%. The company can claim capital allowances on the purchase cost of the development site on a straight-line basis over the four years of construction.

BQK Co has a real after-tax cost of capital of 9% per year and a nominal after-tax cost of capital of 12% per year. New investments are required by the company to have a before-tax return on capital employed (accounting rate of return) on an average investment basis of 20% per year.

Required:

(a) Calculate the net present value of the proposed investment and comment on its financial acceptability. Work to the nearest $1,000. (13 marks)

(b) Calculate the before-tax return on capital employed (accounting rate of return) of the proposed investment on an average investment basis and discuss briefly its financial acceptability. (5 marks)

(c) Discuss the effect of a substantial rise in interest rates on the financing cost of BQK Co and its customers, and on the capital investment appraisal decision-making process of BQK Co. (7 marks)

点击查看答案

第6题

Bar Co is a stock exchange listed company that is concerned by its current level of debt f

inance. It plans to make a rights issue and to use the funds raised to pay off some of its debt. The rights issue will be at a 20% discount to its current ex-dividend share price of $7·50 per share and Bar Co plans to raise $90 million. Bar Co believes that paying off some of its debt will not affect its price/earnings ratio, which is expected to remain constant.

Income statement information

The 8% bonds are currently trading at $112·50 per $100 bond and bondholders have agreed that they will allow Bar Co to buy back the bonds at this market value. Bar Co pays tax at a rate of 30% per year.

Required:

(a) Calculate the theoretical ex rights price per share of Bar Co following the rights issue. (3 marks)

(b) Calculate and discuss whether using the cash raised by the rights issue to buy back bonds is likely to be financially acceptable to the shareholders of Bar Co, commenting in your answer on the belief that the current price/earnings ratio will remain constant. (7 marks)

(c) Calculate and discuss the effect of using the cash raised by the rights issue to buy back bonds on the financial risk of Bar Co, as measured by its interest coverage ratio and its book value debt to equity ratio. (4 marks)

(d) Compare and contrast the financial objectives of a stock exchange listed company such as Bar Co and the financial objectives of a not-for-profit organisation such as a large charity. (11 marks)

点击查看答案

第7题

Recent financial information relating to Close Co, a stock market listed company, is as fo

llows.

Financial analysts have forecast that the dividends of Close Co will grow in the future at a rate of 4% per year. This is slightly less than the forecast growth rate of the profit after tax (earnings) of the company, which is 5% per year. The finance director of Close Co thinks that, considering the risk associated with expected earnings growth, an earnings yield of 11% per year can be used for valuation purposes.

Close Co has a cost of equity of 10% per year and a before-tax cost of debt of 7% per year. The 8% bonds will be redeemed at nominal value in six years’ time. Close Co pays tax at an annual rate of 30% per year and the ex-dividend share price of the company is $8·50 per share.

Required:

(a) Calculate the value of Close Co using the following methods:

(i) net asset value method;

(ii) dividend growth model;

(iii) earnings yield method. (5 marks)

(b) Discuss the weaknesses of the dividend growth model as a way of valuing a company and its shares. (5 marks)

(c) Calculate the weighted average after-tax cost of capital of Close Co using market values where appropriate. (8 marks)

(d) Discuss the circumstances under which the weighted average cost of capital (WACC) can be used as a discount rate in investment appraisal. Briefly indicate alternative approaches that could be adopted when using the WACC is not appropriate. (7 marks)

点击查看答案

第8题

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

Extracts from the recent financial statements of Bold Co are given below.

A factor has offered to manage the trade receivables of Bold Co in a servicing and factor-financing agreement. The factor expects to reduce the average trade receivables period of Bold Co from its current level to 35 days; to reduce bad debts from 0·9% of turnover to 0·6% of turnover; and to save Bold Co $40,000 per year in administration costs. The factor would also make an advance to Bold Co of 80% of the revised book value of trade receivables. The interest rate on the advance would be 2% higher than the 7% that Bold Co currently pays on its overdraft. The factor would charge a fee of 0·75% of turnover on a with-recourse basis, or a fee of 1·25% of turnover on a non-recourse basis. Assume that there are 365 working days in each year and that all sales and supplies are on credit.

Required:

(a) Explain the meaning of the term ‘cash operating cycle’ and discuss the relationship between the cash operating cycle and the level of investment in working capital. Your answer should include a discussion of relevant working capital policy and the nature of business operations. (7 marks)

(b) Calculate the cash operating cycle of Bold Co. (Ignore the factor’s offer in this part of the question). (4 marks)

(c) Calculate the value of the factor’s offer:

(i) on a with-recourse basis;

(ii) on a non-recourse basis. (7 marks)

(d) Comment on the financial acceptability of the factor’s offer and discuss the possible benefits to Bold Co of factoring its trade receivables. (7 marks)

点击查看答案

第9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)

点击查看答案

第10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)

点击查看答案