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Question 3.

Previous Years

Sales 1400 Retained Earnings 170

Costs 900 Dividends 180

Tax rate 0.3

Assets Liabilities/Equity

Current Assets Current Liabilities

Cash 460 Creditors 600

Debtors 540 Short Term Notes 100

Inventory 600

Non-Current Assets Non-Current Liabilities

PP&E 2000 Debentures 900

Total Assets 3600

Owner’s Equity

Retained Profits 1000

Ordinary Shares 1000

3600

Percentage of Sales Approach – Assume all spontaneous variables move as a percentage of sales.

a) Given an expected increase in sales of 12%, what is the amount of external funding required?

b) To maintain the current debt/equity ratio how much debt and how much equity is required?

c) Assuming the company is only operating at 95% capacity, how much new funding (if any) is required?

Question 4.

Previous Years

Sales 1100 Retained Earnings 80

Costs 800 Dividends 130

Tax rate 0.3

Assets Liabilities/Equity

Current Assets Current Liabilities

Cash 400 Creditors

Debtors Short Term Notes

Inventory

Non-Current Assets Non-Current Liabilities

PP&E 600 Debentures 500

Total Assets 1000

Owners’ Equity

Retained Profits 500

Ordinary Shares

1000

a) Given an expected increase in sales of 13%, what is the amount of external funding required?

b) At this growth rate what is the addition to retained earnings?

c) Calculate the Sustainable Growth Rate (SGR)

d) At the SGR what external funding is required?

e) What would be the growth rate at which no external financing would be required?

Question 5.

a) A Ltd wishes to maintain a growth rate of 10 per cent per year and a dividend payout of 20 per cent. The ratio of total assets to sales is constant at 2, and profit margin is 10 percent. What must the debt/equity ratio be?

b) B Ltd wishes to maintain a growth rate of 5 per cent per year, a debt-to-equity ratio of 0.5, and a dividend payout of 60 per cent. The ratio of total assets to sales is constant at 2. What profit margin must it achieve?

c) C Ltd wishes to maintain a growth rate of 4 per cent per year, a debt-to-equity ratio of 0.5, and a dividend payout of 80 per cent. If the profit margin is 8 per cent and next year`s sales are projected at $1500, what is the total asset projection?

Question 6.

Sad Ltd is considering the installation of a new computer. Because of uncertainty as to its future computing requirements and the prospect of advancements in computing technology, it is evaluating the acquisition of the computer by either purchasing it, or leasing it. Information relevant to the company`s evaluation is as follows:

Purchase - Loan

The company applies straight line depreciation. The Tax Commissioner allows a 33.33% depreciation rate on computer capital acquisitions. Sad Ltd plans to operate the computer for a maximum of 5 years. The computer`s disposal value at the end of 5 years is estimated to be $85,000. Mad would borrow the $1,500,000 to cover the purchase cost with a 5 year loan at 10% per annum

Lease

There would be five annual lease payments payable with the first payment made at time zero..

A residual payment of $90,000 would be made at the end.

The company income tax rate is 30 cents in the dollar.

a) Calculate the lease payment.

b) Should the company purchase or lease the asset?

Question 10.

Loan Amount $700,000

Annual Interest rate 8.5%

Term in Years 5

Payments per year 12

a) Prepare an amortisation schedule premised upon payments that are treated as a deferred annuity

b) Immediately after the 30th payment the bank advised an increase in the annual interest rate to 8%.

Question 15.

Calculate the Black—Scholes price for a call option with the following features: share price $25.00, exercise price $23.50, term to expiry 1 year, risk-free interest rate 5. 5 per cent per annum (compounding annually) and volatility (variance) 0.09 per annum.

Question 16.

Determine the profit and/or loss to the following:

1 Call Options- Buyer/Holder and Seller/Writer

Market Price $10.50

Exercise Price $9.00

Call Premium $0.50

2 Put Options- Buyer/Holder and Seller/Writer

Market Price $8.25

Exercise Price $19.75

Call Premium $0.70

Question 17.

Cash Price per Unit $ 61.00

Variable Cost per Unit $ 32.00

Current Quantity Sold per Month 2000

Quantity Sold under New Policy 2200

Monthly Required Return 2.75%

Terms 30 days

The company is planning to switch from a cash basis to offering credit terms.

a) Calculate the cost of switching using both the One Shot Approach and the Accounts Receivable Approach.

b) If the new Credit price was set at $63 per Unit and 2.5% of sales were uncollectable, calculate the NPV of the switch.

c) Calculate the default rate that makes NPV equal to zero.

d) Calculate the NPV associated with a One-Time Sale.

e) Calculate the percentage chance the company would have of collecting given the one time sale extension of credit.

f) Calculate the NPV associated with a repeat sale.

Question 18.

Busy Ltd is considering the acquisition of Bee Finance. The values of the two companies as separate entities are $8 million and $4 million, respectively. Busy estimates that by combining the two companies it will reduce selling and administrative costs by $250,000 per annum in perpetuity. Busy can either pay $5.25 million cash for Bee or offer Bee a 50 per cent holding in Busy. If the opportunity cost of capital is 10 per cent per annum:

(a) what is the gain, in present value terms, from the merger?

(b) what is the net cost of the cash offer?

(c) what is the net cost of the share alternative?

(d) what is the NPV of the acquisition under:

• the cash offer?

• the share offer?

Question 19.

You are an analyst for Black Ltd which is considering the acquisition of Beard Ltd.

You have identified the following effects of the takeover:

Investment of $500,000 will be required immediately to upgrade some of Beard`s older assets; Asset upgrading, economies of scale and improved efficiency will increase net operating cash flows by $320,000 per annum in perpetuity;

Some of Beard`s assets which have been producing a cash inflow of $90,000 per annum will be sold. The new owners of these assets should be able to use them more profitably and sale proceeds are expected to be $810,000;

New plant costing $1.35 million will be purchased and is expected to generate net operating cash flows of $240,000 per annum in perpetuity.

Beard`s activities are all of the same risk and the required rate of return is 11 per cent per annum.

Beard has 5 million shares on issue with a market price of $2..25 Assuming that the market price equals value as an independent entity:

a) Estimate the gain from the takeover; and

b) Estimate the maximum price that Endeavour should be prepared to pay for Beard`s shares.