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first of all thanks for forgiving sir 🙂
sir following question i m facing difficulty need your guidance
A PROJECT HAS REQUIRE AN INVESTMENT OF $25,000 & IS EXPECTED TO GENERATE A CASHFLOW OF $8,000 A YEAR FOR 5 YEARS (WITH THE FIRST RECEIPT IN ONE YEARS TIME)
WHAT IS THE SENSITIVITY TO CHANGE OF CASH INFLOW EACH YEAR?RI co has in issue 6% redeemable bonds, quoted at 120% ex int.
WHICH OF THE FOLLOWING STATEMENT IS CONSISTED WITHABOVE INFORMATION?
(IN THIS I KNOW HOW TO CALCULATE INTEREST YIELD BUT DONT KNOW HOW TO CALCULATE REDEMPTION YIELD 🙁 )
the share price of Cp plc is $4 per share .they announce a 1 for 5 right issue at $3.10 per share
WHAT % OF THE RIGHT OFFERED TO A SHAREHOLDER DOES THE SHAREHOLDER NEED TO TAKE UP SO AS TO HAVE NO NET CASHFLOW RESULTING FROM ISSUE?
Please do not type in capital letters 🙂
Question 1:
To get the sensitivity you need to divide the NPV of the project by the present values of the cash inflows of 8,000 a year, and express it as a percentage.
(The free lecture on investment appraisal under uncertainty explains why)Question 2:
You cannot be asked to calculate the redemption yield, and you do not need to here.
The interest yield is 6/120 which is 5%. Because the bonds are to be redeemed at less that 120, the redemption yield must be less than 5%. Only one of the choices has the interest yield at 5% and the redemption yield at less than 5%.
(The free lecture on this will help!)Question 3:
You really should watch the free lectures – they go through the whole syllabus for F9 and the lecture on rights issues goes through an almost identical example to the one above!
The ex-rights price is therefore ((5 x $4) + $3.10) / 6 = $3.85 per share.
Suppose someone currently owns 10000 shares (any number will do – 10000 is easy!)
They are currently worth 10,000 x $4 = $40,000
After the rights issue, they must be worth in total $40,000 and therefore if there is to be no cash effect, their shares must in total be worth $40,000.
Since the new MV is $3.85, it means they must now own 40,000/3.85 = 100390 shares – 390 more than before.
They were entitled to 1/5 x 10,000 = 2,000 shares.
So they must have taken up 390/2,000 = 19.5% of their rights
sir i also have issue solving the first one mentioned here.. can you please give me your figures (without explaining) so i can just match with mine.. where am i going wrong
thank you so muchThe cost of capital in the first question was given as 10%
The present value of $8,000 a year for 5 years is 8,000 x 3.791 = 30,328
The NPV is 30,328 – 25,000 = 5,328
The sensitivity = 5,328 / 30,328 = 17.57%
It is negative because it is only a problem if the inflows decrease – not if they increase.
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