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7/28/2019 Financial Management 1 S1 2013 Assignment
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Financial Management 1 Assignment (30% of total marks)
1. This is an individual assignment and no marks will be given
to a student in concern if any act of plagiarism (copying the work
of others) isdetected.
2. The assignment consists of 3 questions.3. The assignment is
to be typed and printed with line spacing of 1.5 and
Cambria font with the size of 12 on paper sheets of A4 size if
possible.4. Due date for the assignment is on 9 July 2013.5. In
total, the assignment shall not exceed 10 A4 pages. Any excess of
10
pages will not be graded.
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7/28/2019 Financial Management 1 S1 2013 Assignment
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1. Amy Ltd. has the opportunity to invest in two project with
the following
estimated future cash flows:
Year Project A Project B
1
2,400,000 3,000,0002 3,000,000 4,000,000
3 4,000,000 2,500,000
4 3,200,000 2,000,000
5 1,800,000 1,200,000
The project costs $8m and $9m respectively, and the companys
cost of
capital is 14%.
Required :
Assuming that each project has zero residual value and taxation
is
ignored, determine:
a) NPVs of the projects;
b) The projects internal rates of return (just st ate the
equation);
c) Payback periods of the projects;
d) Discounted payback periods of the project;
After doing all these calculations, which of the two projects
would you
choose? Which method(s) would you implement to make your
decision
and why?
Solution:
a. NPV :
NPV =
2. Valour Ltd. receives a project offer that has the following
characteristics:
- The project requires an initial investment of $9m;
- Working capital of $800,000 is also required. This amount
is
recoverable at the end of the project life;
- The project takes 6 years to complete;
- It is expected that the annual revenues and expenses of the
project would amount to $7m and $4.5m respectively;
1
1
1
n
t t
ACF NPV Initial Outlay
WACC
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7/28/2019 Financial Management 1 S1 2013 Assignment
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- Straight line method is implemented for depreciation;
- Salvage value is estimated to be $500,000;
- Corporate tax rate of 30% is applied and;
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Valours cost of capital is 10%. Required :
Using the abovementioned information, calculate the NPV of the
project
and suggest whether Valour Ltd should take this project.
3. Valuation of a company can be done using several methods, one
of which
is dividend growth model. Ohio Ltd, a retail business selling
consumer
goods, is traded in the stock exchange and the following
information is
available for Ohio Ltd:
Cost of Equity 18%
Current years earnings per share $0.50
Retention Ratio 80%
Expected annual growth rate of dividends (first 3 years) 20%
Expected annual growth rate of dividends (after 3 years) 6%
Ohio Ltd is expected to grow indefinitely at 6% per annum after
3 years.
Required :
a) Using dividend growth model, calculate the expected current
share
price of Ohio Ltd.
b) If Ohio is experiencing a boom in the industry trend and
changes its
terminal growth rate of 6% to 10% due to this fact, calculate
the new
expected current share price of Ohio.
c) Do you think that the decision to update the terminal growth
rate to
10% due to industry trend is appropriate and accurate? State
your
opinions and explain briefly.
