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Hi Sir,
Could you please help me with the following questions which I am struggling with:
1. PQR Co has a demand of 7500 units per month. Each unit costs $5, ordering costs are $100 per order and the inventory holding cost is 10% of purchase price per year. There is a lead time of 4 weeks between placing an order and receiving delivery
What is the EOQ (to the nearest unit)?
I am aware that I need to use the formula but am unsure how the lead time of 4 weeks affects the formula?
2. A company has agreed to lease a machine for a period of 8 years with equal annual payments payable at the start of each year. The NPV of the agreement at a rate of 10% is $32,000.
What is the annual lease payment?
3. A company has 4m shares in issue with a nominal value of $0.50c per share. A dividend of 24 cents per share has just been paid. Four years ago, the dividend was 20.51 cents per share.
The beta of shares in the company is 0.5. The risk free rate is 3% and the market premium is 8%.
What is the market capitalisation of the company?
4. Beta plc is about to pay a dividend of $0.40c per share. Dividends are growing at the rate of 5% pa. The shareholders required rate of return is 20% pa. The rate of corp tax is 25%.
What is the current market value per share?
Thank you so much for your help it really is invaluable!
1. The lead time is not relevant at all to the EOQ – it is just mentioned to confuse (and that can happen in the real exam).
2. Since the payments are at the start of each year, the first payment is immediate (time 0) followed by seven more payments at times 1 to 7.
If the annual payment is X, then the PV of the payment at time 0 is X, and the PV of the seven year annuity at 10% is (X x 4.868). So the total PV is X + 4.868X = 5.868X = 32,000
Now there should be no problem 🙂3. You use the dividend valuation formula.
D0 = 24c; g = (fourth root (24/20.51)) – 1 = 0.04; Re = 3% + 0.5×8% = 7% (0.07)
From the formula this gives $8.32 per share. Then multiply by the 4M number of shares.4 Again, use the dividend valuation formula from the formula sheet.
Do = 40c; g = 0.05; Re = 0.20 (tax is not relevant – it is investors determine the market value and company tax does not affect them).The free lectures on the valuation of securities might be of help.
Hi,
Could you let me have the workings to the question 11 in the MCQ please;
LJM Co is considering investing in a new project which will cost $160,000.
It has an expected life of 4 years and an expected scrap value of $20,000.
The anticipated net operating cash flows each year are as follows:
Year 1: 40,000
Year 2: 60,000
Year 3: 80,000
Year 4: 20,000The cost of capital is 10% p.a..
What is the Accounting Rate of Return (ARR) of the investment?
Thanks
The total profit before depreciation is 200,000. The total depreciation is 140,000. So the average annual profit is (200,000-140,000)/4 = 15,000
The average investment is (160,000+20000)/2 = 90,000
The ARR is 15,000/90,000 = 16.67%
I do suggest that you watch the free lectures on investment appraisal.
Thanks for the solution.please from which formulae did u get $8.32 after using the capm.thanks
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Hi. Can I have help with the following question please.
AJT has a gearing ratio (Debt: (equity+debt)) of 30% and pays corporation tax of 25%. AJT has an asset (ungeared) beta of 1.2. The risk free rate is 5% and the market return is 12%.
What is the cost of equity for AJT.You need to calculate the equity beta by using the asset beta formula backwards.
The asset beta is 1.2; Ve is 70; Vd is 30; and t is 0.25.
If you put these in the formula then you should end up with an equity beta of 1.5857.
If you then use this in the normal CAPM formula, the cost of equity is 5% + 1.5857×7% = 16.10%
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Thanks for the help.
Also with regards to the Beta Plc question by lee buckle, I did use the formula but I’m not getting the suggested answer of $3.20, I’m getting $2.80. Can you show the workings please?It is because the current dividend is about to be paid and therefore the question is asking for a cum div market value. The formula gives the ex div value of 2.80, and therefore the cum div value is higher by the amount of the current dividend.
I do suggest that you watch the free lecture on the valuation of securities.
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Hi Sir,
Need help with the following question please.
The share price of CP Plc is $4 per share.
They announce a 1 for 5 rights issue at $3.10 per share.
What % of the rights issue offered to a shareholder does the shareholder need to take up so as to have no net cash flow resulting from the issue.Have you watched the free lectures? If not, why not, because I go through an almost identical example. Our lectures are a complete course containing everything you need to be able to pass F9 well!!
Suppose a shareholder currently owns 1,000 shares (and number will do – the final answer will be the same). They are currently worth 1,000 x $4 = $4,000 in total.
As you will be aware, in theory the total wealth (shares together with the change in the cash balance due to taking up rights and selling rights) will remain unchanged at $4,000.
For there to be no change in the cash balance, their shares must be worth $4,000 in total.I assume that you are able to calculate the TERP, which is ((5x$4.00)+$3.10) / 6 = $3.85
Therefore after the rights issue they must hold 4,000/3.85 = 1,038.96 shares (38.96 more than before).
The rights issue entitled them to 200 shares (1/5 x 1,000), and therefore they must have taken up 38.96/200 = 19.48% of the rights (and sold the remaining 80.52%).Thank you very much for your help John Moffat! Your a star! Sorry for late reply!
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Thank you for all your help.
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