Reference no: EM132624605

FIN700 Financial Management - Kings Own Institute

Assessment

Topic: Financial mathematics calculations and their application to decision making.

QUESTION 1

Leila owns 14% of the ordinary share of Datafarm Ltd. Assume dividends from Datafarm is the only income Leila has and she has no savings.

In early March, 2020, Datafarm Ltd reported net profits after tax of $1,000,000 for the year, 2019 (1 January to 31 December, 2019), and announced due to the effect of COVID 19 Global pandemic it expects net profits after tax for the current year, 2020, to be 30% lower than last year's figure. The company currently has a dividend payout ratio of 30%, which it will apply for the annual dividend for 2019, payable in July 2020, but it will reduce the dividend payout ratio to 20% for the dividend for 2020, payable in July, 2021.

In July, 2021, Leila wishes to spend $45,000. How much can she consume in July, 2020 if the capital market offers an interest rate of 9% per year?

QUESTION 2

Charge Car P/L is considering a project to launch charging stations for electric cars around Australia. The initial investment is expected to be $100,000,000 and the term of the project is 6 years. The required rate of return from the project is 14% p.a. The annual cash flows are outlined in the following table:

End of year	Cash flow p.a. ($m)
Year 1	20
Year 2	22
Year 3	25
Year 4	30
Year 5	34
Year 6	37

a. Based on Charge Car's required rate of return would you recommend proceeding with this investment? Present all calculations to support your answer.

b. Would you change your opinion if Charge Car's required rate of return increased to 16% pa? Present all calculations to support your answer.

QUESTION 3

a. Debra wins $200,000 in a lottery. She takes only $20,000 in cash and invests the balance at a rate of interest of 10% pa, with intererst compounded on a monthly basis, on the understanding that she will receive 160 equal monthly payments with the first one to be made in 2 years. Find the size of the payments. (5 marks)

b. An investment firm (Firm A) pays 10% interest per annum, compounded on a quarterly basis. To remain competitive, the investment manager of another firm (Firm B) is willing to match the interest rate offered by Firm A, but interest will be compounded on a monthly basis. What nominal rate of interest must Firm B offer to its clients? (5 marks)

QUESTION 4

‘Evaluating mutually exclusive projects using the IRR and NPV approaches can be problematic'. Discuss this statement with examples.

QUESTION 5

It is July 2020 and Bundle Box Company has just paid an annual dividend of $1.20 a share. The dividend is expected to increase by 20% in July 2021, 15% in July 2022, 10% in July 2023 and thereafter by 5% a year forever from July 2024 onwards. Investors require a 12% per annum return on Company shares.

a. What would a share in Natural Company be expected to sell for today (July 2020)?

b. Draw a timeline showing all the expected cash flows.

QUESTION 6

Sprint Bolt Ltd is a producer of specialised sport shoes. The company has been conducting research and development of a new model, where the lower mould can automatically adjust itself to avoid foot injury. The model has been tested and the managing board is happy to launch its production if it is financially viable.
The company has already spent $800,000 for research and development. The new model will have a five- year lifetime, after that the company will stop its production. The new production facilities and equipment will cost $22,000,000 which will be depreciated on a straight-line basis to zero book value. The company will not sell the equipment after the production of new product is finished.

The company expects to sell 80,000 pairs in the first year at $300 per pair. As the new technique can be potentially followed by competitors, every year the sale quantity is expected to decrease by 10% and the sale price will decrease by 8%. Variable costs are expected to be 40% of sales. While the new model generates a high gross profit rate, the company expects a high level of product returns of 5% on sales.

As a financial manager of the company, you're conducting a capital budgeting analysis of the financial viability of the new model.

The company tax rate is 30%. Company's required payback is 2 years and required rate of return is 25%. Assume that all cash flows are made at the end of each year.

a. Calculate the incremental cash flows for each year (Y0 to Y5 inclusive).

b. Calculate the payback period of the project.

c. Calculate the net present value, that is, the net benefit or net loss in present value terms of the project.

d. Calculate the present value index of the project.

e. Calculate the discounted payback period of the project.

f. Calculate the internal rate of return of the project.

g. Identify and explain what other factors Sprint Sport should consider. Explain if the company should accept the project or not.

Attachment:- Financial Management.rar