Andrew Co is a large listed company financed by both equity and debt.In which of the follo

The company has an issued share capital of $1m of $0·50 nominal value ordinary shares. The owners have made the following valuations of the company’s assets and liabilities.

The net realisable value of the non-current assets exceeds their book value by $4m. The current assets include $2m of accounts receivable which are thought to be irrecoverable. What is the minimum price per share which the owners should accept for the company?

A.$14

B.$25

C.$28

D.$13

t is planning to invest $4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be designed and built according to customer requirements. Degnis Co expects motorhome production and sales in the first four years of operation to be as follows.

The selling price for a motorhome depends on the van or truck which is converted, the quality of the units installed and the extent of conversion work required. Degnis Co has undertaken research into likely sales and costs of different kinds of motorhomes which could be selected by customers, as follows:

Fixed costs of the production facility are expected to depend on the volume of motorhome production as follows:

Degnis Co pays corporation tax of 28% per year, with the tax liability being settled in the year in which it arises. The company can claim tax allowable depreciation on the cost of the investment on a straight-line basis over ten years. Degnis Co evaluates investment projects using an after-tax discount rate of 11%.

Required:

(a) Calculate the expected net present value of the planned investment for the first four years of operation. (7 marks)

(b) After the fourth year of operation, Degnis Co expects to continue to produce and sell 450 motorhomes per year for the foreseeable future.

Required:

Calculate the effect on the expected net present value of the planned investment of continuing to produce and sell motorhomes beyond the first four years and comment on the financial acceptability of the planned investment. (3 marks)

(c) Critically discuss the use of probability analysis in incorporating risk into investment appraisal. (5 marks)

Dinla Co has the following capital structure.

The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex dividend basis and have a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a dividend of $0·25 per share has just been paid.

The 5% preference shares have an ex dividend market value of $0·56 per share and a nominal value of $1·00 per share. These shares are irredeemable.

The 6% loan notes of Dinla Co are currently trading at $95·45 per loan note on an ex interest basis and will be redeemed at their nominal value of $100 per loan note in five years’ time.

The bank loan has a fixed interest rate of 7% per year.

Dinla Co pays corporation tax at a rate of 25%.

Required:

(a) Calculate the after-tax weighted average cost of capital of Dinla Co on a market value basis. (8 marks)

(b) Discuss the connection between the relative costs of sources of finance and the creditor hierarchy. (3 marks)

(c) Explain the differences between Islamic finance and other conventional finance. (4 marks)

of $1,000 per loan note in eight years’ time. Alternatively, the loan notes are convertible after seven years into 110 ordinary shares of Darlga Co per loan note. The ordinary shares of Darlga Co are currently trading at $6?50 per share on an ex dividend basis. The current cost of debt of the convertible loan notes is 8%.

Required:

(a) Justifying any assumptions which you make, calculate the current market value of the loan notes of Darlga Co, using future share price increases of:

(i) 4% per year;

(ii) 6% per year. (6 marks)

(b) Discuss the limitations of the dividend growth model as a way of valuing the ordinary shares of a company. (4 marks)

are looking forward to paying less interest on the company’s debt finance. The dollar is the domestic currency of Plam Co. The company has a number of different kinds of debt finance, as follows:

The 7% loan notes were issued domestically while the 10% loan notes were issued in a foreign country.

The interest rate on the long-term bank loan is reset to bank base rate plus a fixed percentage at the end of each year. The annual payment on the bank loan consists of interest on the year-end balance plus a capital repayment.

Relevant exchange rates are as follows:

Plam Co can place pesos on deposit at 3% per year and borrow dollars at 10% per year. The company has no cash available for hedging purposes.

Required:

(a) Evaluate the risk faced by Plam Co on its peso-denominated interest payment in six months’ time and advise how this risk might be hedged. (5 marks)

(b) Identify and discuss the different kinds of interest rate risk faced by Plam Co. (5 marks)

Section A暂缺

Section B – ALL FIVE questions are compulsory and MUST be attempted

Crago Co is concerned that it may be overtrading. Financial information relating to the company is as follows.

Required:

Evaluate whether Crago can be considered to be overtrading and discuss how overtrading can be overcome.

Note: Up to 4 marks are available for calculations.

existing machine which is becoming out of date and which has no resale value. The forecast levels of production and sales for the goods produced by the new machine, which has a maximum capacity of 400,000 units per year, are as follows:

The new machine will incur fixed annual maintenance costs of $145,000 per year. Variable costs are expected to be $3·00 per unit and selling price is expected to be $5·65 per unit. These costs and selling price estimates are in current price terms and do not take account of general inflation, which is forecast to be 4·7% per year.

It is expected that the new machine will need replacing in four years’ time due to advances in technology. The resale value of the new machine is expected to be $200,000 at that time, in future value terms.

The purchase price of the new machine is payable at the start of the first year of the four-year life of the machine. Working capital investment of $150,000 will already exist at the start of the four-year period, due to the operation of the existing machine. This investment in working capital is expected to increase in nominal terms in line with the general rate of inflation.

Argnil Co pays corporation tax one year in arrears at an annual rate of 27% and can claim 25% reducing balance tax-allowable depreciation on the purchase price of the new machine. The company has a real after-tax weighted average cost of capital of 6% and a nominal after-tax weighted average cost of capital of 11%.

Required:

(a) Using a nominal terms net present value approach, evaluate whether purchasing the new machine is financially acceptable. (10 marks)

(b) Discuss the reasons why investment finance may be limited, even when a company has attractive investment opportunities available to it. (5 marks)

ne possibility, which is an issue of 8% loan notes. Extracts from the financial statements of KQK Co are as follows.

It is expected that investing $20 million in the business will increase income by 5% over the first year. Approximately 40% of cost of sales and other expenses are fixed, the remainder of these costs are variable. Fixed costs will not be affected by the business expansion, while variable costs will increase in line with income.

KQK Co pays corporation tax at a rate of 30%. The company has a policy of paying out 40% of profit after tax as dividends to shareholders.

Current liabilities are expected to increase by 3% by the end of the first year following the business expansion.

Average values of other companies similar to KQK Co:

Required:

(a) Assess the impact of financing the business expansion by the loan note issue on financial position, financial risk and shareholder wealth after one year, using appropriate measures. (10 marks)

(b) Discuss the circumstances under which the current weighted average cost of capital of a company could be used in investment appraisal and indicate briefly how its limitations as a discount rate could be overcome. (5 marks)

d a net profit margin of 10%. Due to fierce competition, ZXC Co has lost market share and is looking for ways to win back former customers and to keep the loyalty of existing customers. The sales director has pointed out that a major competitor of ZXC Co currently offers an early settlement discount of 0·5% for settlement within 30 days, while ZXC Co itself does not offer an early settlement discount. He suggests that if ZXC Co could match this early settlement discount, annual income from credit sales would increase by 20%.

Credit customers of ZXC Co take an average of 51 days to settle invoices. Approximately 0·5% of the company’s credit sales have historically become bad debts each year and written off as irrecoverable. The finance director has been advised that offering an early settlement discount of 0·5% for payment within 30 days would increase administration costs by $35,000 per year, while 75% of credit customers would be likely to take the discount. The credit controller believes that bad debts would fall to 0·375% of credit sales if the early settlement discount were introduced.

ZXC Co has an average short-term cost of finance of 4% per year. Assume that there are 360 days in each year.

Required:

(a) Evaluate whether ZXC Co should introduce the early settlement discount. (6 marks)

(b) Discuss TWO ways in which a company could reduce the risk associated with foreign accounts receivable. (4 marks)

x months in three months’ time. The lending bank will fix the interest rate for the loan period at its prevailing lending interest rate when the loan is taken out. The finance director of GXJ Co believes this lending interest rate could be a minimum of 3·5% per year or a maximum of 5·5% per year. The uncertainty regarding the future interest rate is caused by the volatile state of the economy and impending elections which could lead to a change in political leadership and direction. Interest on the euro loan would be payable at the end of the loan period.

The finance director of GXJ Co would like to hedge the interest rate risk arising from the future loan and the company’s bank has offered a 3–9, 4·5%–3·5% forward rate agreement.

The finance director is also concerned about the foreign currency risk associated with the euro interest payment which would be due in nine months’ time.

The following exchange rates are available:

Required:

(a) Evaluate the proposed forward rate agreement as a way of managing the interest rate risk anticipated by GXJ Co. (3 marks)

(b) Analyse the foreign currency risk associated with the future interest payment of GXJ Co and briefly discuss ways that this risk might be hedged. (4 marks)

(c) Explain the nature of four-way equivalence in the relationship between spot exchange rates, forward exchange rates and future (expected) spot rates. (3 marks)