- This topic has 14 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
dear sir,
Note;- I have got the answer for all of these question but didnt understated how it comes. would u mind to explain them please.1) new project will costy £160000, ex life 4 yrs, scrap value £20000,
net operating cash flow-(40,60,80,20)’000 for 4 yrs. cost of capital 10% pa
what is ARR?2) what will b the effect on the NPV and IRR if there is a decrease in the cost of capital? Ans- NPV-Inc, IRR-No change . how?
3) R plc in issue £400000 8% bond , redeemable in 5 yrs time at a prem of 10%, investor req a return is 12% pa, corp tax rate 30%.
What is the total MV of the debt in issue?
4)a company has 4m sh in issue with a nom value of 50c/sh. A dividend of 24c/sh has just been paid , four yr ago, the div was 20.51c/sh, the beta of sh in the company is 0.5. the Rf is 3% and M.premium is 8%.
What is the market capitalisation of the company ?
5) a project has req an investment of £25000, and is expected to generate a cash inflow of £8000 ayear for 5yrs (with the 1st recv in one yr time). The cost of the capital is 10%.
What is the sensitivity to change of the cash inflow each year?6)sh price is £4/sh, company announce a 1for 5 right issue @£3.10/sh.
What % of the right offered to a sh.holder does the sh.holder need to take up so as to have no net cash flow resulting from the issue?
7) RI has in issue 6% redeemable bond, quoted @120% ex int.
How the redemption yield is 4%?8) project initial cost npv
A 20000 2000
B 30000 2400
C 10000 1200
The capital available for investment is limited to £40000.
If the project are indivisible , what is the max NPV that b achieved?
9) a company has just paid a div of 23c/sh, sh.holder are expecting the div to remain @ 23c/sh nxt yr. But to increase @ an avg rate of 3% per annum thereafter. Sh,holder req rate of return is 125 and the rate of the corp tax is 25% .
What will be the current MV per sh?83 A company is going to take on a project using a mix of equity and debt finance in an economy where the corporation tax rate is 30%.
Assuming perfect markets, other than tax, which of the following statements is true about the project?
A ?e > ?a; WACC < Cost of equity calculated using ?a; WACC < Cost of equity calculated using ?e
B ?e < ?a; WACC > Cost of equity calculated using ?a; WACC > Cost of equity calculated using ?e
C ?e > ?a; WACC < Cost of equity calculated using ?a; WACC > Cost of equity calculated using ?e
D ?e < ?a; WACC > Cost of equity calculated using ?a; WACC < Cost of equity calculated using ?e
74 A company incorporates increasing amounts of debt finance into its capital structure, while leaving its operating risk unchanged.
Assuming that a perfect capital market exists, with corporation tax (but without personal tax), which of the following correctly describes the effect on the company’s costs of capital and total market value?
Cost of equity Weighted average cost of capital Total market value
A Increases Unaffected Increases
B Unaffected Decreases Increases
C Increases Decreases Increases
D Decreases Increases Decreases49 A company is considering a project which has an initial outflow followed by several years of cash inflows, with a cash outflow in the final year.
How many internal rates of return could there be for this project?
A Either zero or two B Either one or two C Zero, one or two D Only two
Question 1:
Total cash inflow = 200,000
Total depreciation = 160,000 – 20,000 = 140,000
So total profit = 60,000
So average profit per year = 60,000/4 = 15,000Average investment = (160,000+20,000)/2 = 90,000
ARR = 15,000/90,000 = 16.67%
(The free lecture on investment appraisal will help you)
Question 2:
Lower cost of capital always means higher NPV (and vice versa)
IRR is completely independent of the cost of capital – it is the rate of interest at which the NPV is zero.
(Again, the free lectures on investment appraisal explain this)
Question 3:
The receipts to the investor are interest of 32,000 per year for 5 years; and a repayment of 440,000 in 5 years time.
The market value is the present value of these receipts discounted at the investors required return of 12%.
(Tax is irrelevant – investors fix the market value and they are not affected by company tax)
(The free lectures on the valuation of securities deal with this)
Question 4:
Dividend growth rate = (fourth root of 24/20.51) – 1 = 0.04 (4%)
Re = 3% + 0.5×8% = 7%
The MV per share is given by the dividend valuation formula with Do = 24c; g = 4%; Re = 7%
Market capitalisation = 4M shares x MV per share
(The lectures on CAPM and on valuation of securities explain this)
Question 5:
The sensitivity is (NPV of project) / (PV of the inflows)
It is negative because we only have a problem if the cash flows fall.
(The lecture on investment appraisal under uncertainty explains this)
Question 6:
You have to watch the free lecture on rights issues because it would take too long to type it all out here.
(Alternatively, if you search this forum you will find it has been answered before)
Question 7:
You cannot be asked to calculate the redemption yield.
However, you are expected to know what it means, and since the bonds are being repaid at less than market value, the redemption yield must be less that the interest yield.
The interest yield is 5% and only one of the answer choices has a reception yield of less than 5%(The lectures on debt finance deal with this)
Question 8:
If the projects are indivisible, then the only possibilities are A + B; or A + C; or B + C
Whichever of those three combinations gives the highest NPV is the best.
(The free lectures on capital rationing deal with this problem)
Question 9:
It is the dividend valuation formula.
MV = 23 / (0.12 – 0.03) = 256 ($2.56)
(The lectures on the valuation of securities explain this)
Question 83:
The cost of equity using the asset beta will be the cost of equity if it were all equity financed – no gearing.
With gearing, the cost of equity is based on the equity beta which will always be higher than the equity beta.
The WACC (with gearing) will always be lower than the WACC without gearing (which equals the cost of equity if there is no gearing)
(You need to watch the lectures on CAPM and on Modigliani and Miller)
Question 74:
This is pure Modigliani and Miller. They proved that with higher gearing, the cost of equity will increase because there is more risk; the WACC will fall because of the cheap debt (due to tax relief on the interest) and therefore the MV will increase.
You need to watch the free lecture on M&M
Question 49:
There is potential one IRR for every change of sign of the cash flows.
Here, the sign of the cash flows changes twice and there are therefore potentially two IRRs
(This is covered in the free lectures on investment appraisal methods)
Dear legend , thank you so much for your patiently answering all my question. So great full to u. And wish me best of luck for tomorrow exam. 🙂
- You must be logged in to reply to this topic.