Reference no: EM133495836
1. With regards to payback period (PBP) and discounted payback period (DPBP), which of the following statements is true?
A. We cannot say which method is more likely to accept a project
B. We are equally likely to accept a project using either PBP or DPBP
C. We are more likely to accept a project using PBP rather than DPBP
D. We are less likely to accept a project using PBP rather than DPBP
2. Which of the following cash flows should not be included in the calculation of free cash flow for a project?
A. An increase in utility payments to the local government because of the project
B. The reduction in revenue earned elsewhere in the company because of the project
C. An increase in salaries paid to new employees because of the project
D. A payment to a consultant investigating the feasibility of a project
3. We can use the weighted average cost of capital (WACC) as a discount rate in net present value (NPV) calculations if the project
A. Is expected to generate a negative return
B. Has the same risk and funding mix as the company
C. Is small in value relative to the company
D. Has less risk than the company
4. The value of a company with debt will
A. Always be less than the value of a company without debt
B. Be greater than the value of a company without debt as long as the value of the debt is greater than the cost
C. Always be greater than the value of a company without debt
D. Be the same as the value of a company without debt
5. You are thinking of buying shares in Qantas Airways Limited (QAN). You expect the company to pay a $0.24 dividend over the next year and you believe this will increase at a rate of 2.5% a year into the future. Assume the required return on equity for QAN is 5.6%.
(a) Calculate the valuation for QAN shares today. If the current market price for QAN shares is $6.25, should you buy them? Explain your answer.
(b) Say you have an investment horizon of four years. What do you think QAN shares will be worth in four years? (Hint: use t = 4 in the constant growth DDM.)
(Include enough working to show you understand the calculations.)
6. Say QAN is considering an upgrade of their premium economy cabins that will require an initial investment of $28,000 now, but that is expected to generate free cash flows of $8,700, $9,500 and $14,800 over the next three years. Assume an appropriate discount rate for QAN is 5.6%.
(a) Calculate the discounted payback period (DPBP) for this project. If QAN management require a payback period of two years, should QAN accept or reject the project? Explain your answer.
(b) State one advantage and one disadvantage of the DPBP method you used in Part (a).
7. Once again consider the investment project from Question 7 where QAN is considering a project that requires an initial investment of $28,000 now, but that is expected to generate free cash flows of $8,700, $9,500 and $14,800 over the next three years. Assume an appropriate discount rate for QAN is 5.6%.
(a) Calculate the net present value (NPV) of this project. (Hint: You can use the same discounted cash flows you calculated in Question 7.) Based on your NPV calculation, should the project be accepted or rejected? Explain your answer.
(b) Given your answer to Part (a), is the internal rate of return (IRR) for the project greater than or less than the discount rate? Explain your answer.
8. According to their 2022 annual report, QAN have (approximately) $5.34b in long term debt and (approximately) $7.96b in equity, giving total capital of $13.30b. Say that the QAN before tax cost of debt is 4.0%, their cost of equity is 6.5% and that QAN have a tax rate of 30%.
(a) Calculate the weighted average cost of capital (WACC) for QAN.
(b) Say QAN has (before tax) free cash flow (FCF) per share of $0.75. Given this, calculate the value of QAN shares using the WACC from Part (a).
(c) If QAN decreased their financial leverage, would the value of the company most likely increase or decrease? Explain your answer.
9. (a) Briefly explain why, and how, you might diversify your share portfolio across the market sectors mentioned in the article.
(b) The article talks about undertaking research before investing in shares. Explain, in general terms, what market efficiency means. What implication does market efficiency have for stock market research?