QUESTIONS

1. What is the payback period of the project?

2. What is the profitability index of the project?

3. What is the IRR of the project?

4. What is the NPV of the project?

5. How sensitive is the NPV to changes in the price of the new smart phone?

6. How sensitive is the NPV to changes in the quantity sold?

7. Should Emu Electronics produce the new smart phone?

8. Suppose Emu Electronics loses sales on other models because of the introduction of

the new model. How would this affect your analysis?

QUESTIONS

1. Most publicly traded corporations are required to submit half-yearly and annual reports

to the ASX detailing the financial operations of the company over the past half-year

or year, respectively. These reports are available on the ASX website at

www.asx.com.au or in the investor section of the company’s own website. Go to the

ASX website and search for announcements made by Harvey Norman. Find the most

recent annual report or half-year report and download the report. Look on the balance

sheet to find the book value of debt and the book value of equity. If you look in the

report, you should find a section titled ‘Interest Rate Risk Management’, which will

provide a breakdown of Harvey Norman’s long-term debt.

2. To estimate the cost of equity for Harvey Norman, go to http://au.finance.yahoo.com

plus the business section of www.smh.com.au and enter the ASX code for Harvey

Norman, HVN. Follow the various links to answer the following questions—What is

the most recent stock price listed for Harvey Norman? What is the market value of

equity, or market capitalisation? How many shares does Harvey Norman have

outstanding? What is the most recent annual dividend? Can you use the dividend

discount model in this case? What is the beta for Harvey Norman? Now go back to

http://au.finance.yahoo.com and find the ‘Bonds’ link. What is the yield on

government debt? Using the historical market risk premium, what is the cost of equity

for Harvey Norman using the CAPM?

HI5002 Finance for Business Term 2 2016 Page 6 of 6

3. You now need to calculate the cost of debt for Harvey Norman. Go to

www.westpac.com.au and find the current business loan rates equivalent for each

of Harvey Norman’s debts. What is the weighted average cost of debt for Harvey

Norman using the book-value weights and the market-value weights? Does it make

a difference in this case if you use book-value weights or market-value weights?

4. You now have all the necessary information to calculate the weighted average cost of

capital for Harvey Norman. Calculate the weighted average cost of capital for Harvey

Norman using book value weights and market value weights. Assume Harvey

Norman has a 30% tax rate. Which cost of capital number is more relevant?

5. You used Harvey Norman as a pure play company to estimate the cost of capital for

HCL. Are there any potential problems with this approach in this situation?