Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › need help in solving this questions
- This topic has 1 reply, 2 voices, and was last updated 2 months ago by John Moffat.
- January 7, 2023 at 9:04 am #675464bryan11Participant
- Topics: 2
- Replies: 0
Q1.a. The Duffers Brothers Inc. wants to set up a private cemetery business. According to the
Chief Financial Officer, Shawn Levy, business is “looking bright”. As a result, the cemetery
project will provide a net cash inflow of $180,000 for the firm during the first year, and the
cash flows are projected to grow at a rate of 4% per year forever. The project requires initial
outlays of $2.2 million.
i. If the company requires a return of 11% on such undertakings, should the cemetery
business be started?
ii. The company is somewhat unsure about the assumption of a growth rate of 4% in its
cash flows. At what constant growth rate would the company break even if it still
required a return of 11% of investment?
Q1.b. Hello Sunshine Inc. is financed entirely by common stocks and has a beta of 1.0. Assume
that the firm pays no taxes. The stock has a price-earning (PE) multiple of 10 and is priced to
offer a 10% expected return. The company decides to repurchase half the common stocks and
substitute an equal value of debt. Assume that the debt yields a risk-free of 5% and a beta of 0.
Calculate the following:
i. The beta of the common stocks after refinancing
ii. The required rate of return and risk premium on the common stocks before the
iii. The required rate of return and risk premium on the common stocks after the
iv. The required return on the debt
v. The required return on the company (i.e., stock and debt combined) after the
refinancingJanuary 7, 2023 at 4:46 pm #675472John MoffatKeymaster
- Topics: 56
- Replies: 51875
Yet again, these questions are examinable in Paper FM and not in Paper PM.
There is no point in typing out full questions and expecting to be provided with a full answer. You must have answers in the same book in which you found the questions, so ask about whatever it is in the answer that you are not clear about and then I will explain.
Everything needed to be able to answer these questions is cover in our free Paper FM lectures.
- You must be logged in to reply to this topic.