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    FM 2016

    Uploaded by

    natinael Tsegaye
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    © All Rights Reserved
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    FM 2016

    Uploaded by

    natinael Tsegaye
    3 views6 pages
    Answer

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    © © All Rights Reserved

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    Copyright:

    © All Rights Reserved
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    Download as xlsx, pdf, or txt
    3 views6 pages

    FM 2016

    Uploaded by

    natinael Tsegaye
    Answer

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 6

    Gadner Co

    (a) Calculate the market value weighted average cost of capital of Gadner Co.

    1 calculate cost of capital by CAPM


    E(ri) = Rf + βi(E(rm) − Rf)

    4 + 1.25(5.6)
    0.11

    2 cost of capital of 10% preference share


    preference share dividend
    cost of preference share
    number of prefenence share
    value of preference share
    3 cost of debt loan note
    after tax interest cost 8*(1-20%)
    8*.8

    year 5% df
    0 market value -108.29 1
    1 to 6 interst 6.4 5.076
    6 redemption 105 0.746
    NPV

    After tax kd= IRR A + NPVA/NPVA+ NPVA* B-A

    5 + 2.53/2.53+2.8*(6-5)

    4 cost of debt of bank loan


    after tax cost of debt
    Market value
    market value of equity
    market value of preferencshare
    market value of debt loan not
    bank laon

    WACC 254000*.11/264697 + 2200*.091/264697 + 6497*.055 + 2000*.056/26469


    0.105554494 0.000756335347
    WACC 11%
    11%

    (a) Calculate the net present value of the investment project and comment on its fi
    $'000 $'000 $'000
    year 1 2 3
    sale revenue 2,714 2,795 2,879
    variable cos 991 1,051 1,114
    contribution 1,723 1,745 1,766
    fixed cost 110 205 330
    taxable cash flow 1,613 1,540 1,436
    taxation at 20% (323) (308)
    TAD 160 120
    after tax cash flow 1,613 1,377 1,248
    DF at 10% 0.909 0.826 0.751
    pv 1,466 1,138 937

    toatl pv 4,387
    intial investment 3200
    NPV 1,187
    so Npv is positive and the project ia acceptable
    WORKING
    sale volume 850 850 850
    SP 3.1
    inflation at 3% 3.19 3.29 3.39
    VC/U 1.1
    inflation at 6% 1.17 1.24 1.31

    Revised sale 2,714 2,795 2,879


    revised variable cost 991 1,051 1,114

    tax allowable deperciation


    cost year 1 2 3
    3200 800 600 450
    tax benefit 160 120 90
    1850
    1350

    B Determine the net present value of the optimum investment schedule for Delta Division

    ProjectInitial investmentNet presentPI RANK


    $'000 $'000
    A 3,000 6,000 2 2
    B 2,000 3,200 1.6 4
    C 1,000 1,700 1.7
    D 1,000 2,100 2.1 1
    E 2,000 3,600 1.8 3

    OPTIMIUM INVESTMENT SCHEDULE


    project intial investm RANK NPV
    $'000 $'000
    D 1,000 1st 2,100
    A 3,000 2nd 6,000
    E 2,000 3rd 3,600
    B 1000 4th 1600
    7,000 13,300
    the NPV of the optimal investment schedule of delta division is $13, 300,000
    (c) Discuss the reasons why hard and soft capital rationing occur. (5)
    (d) Discuss TWO ways in which the risk of an investment project can be assessed.
    pital of Gadner Co.

    i(E(rm) − Rf)

    11%

    .1*.5 0.05 D/P0 4000


    .05/.55 0.090909091 9% 2200
    2000/.05 40000
    2000
    -108.29
    6.4
    6.4 6.4
    6.4
    pv 6% df pv 6.4
    (108.29) 1 (108.29) 6.4
    32.49 4.917 31.47 111.4
    78.33 0.705 74.02 5%
    2.53 (2.80)

    PVA/NPVA+ NPVA* B-A

    53/2.53+2.8*(6-5)
    0.47467166979
    5 5% 5.50%

    7*.8 5.6 %

    8m/.2*6.35 254,000
    2m/.5*.55 2,200
    6m/100*108.29 6,497
    2,000
    264,697

    264697 + 6497*.055 + 2000*.056/264697


    0.0013500586 0.000423
    10.80%

    nt project and comment on its financial acceptability.


    $'000
    4 5
    2,966
    1,180
    1,785
    330
    1,455
    (287) (291)
    90 270
    1,258 (21)
    0.683 0.621
    859 (13)

    850

    3.49

    1.39

    2,966
    1,180

    4
    1350
    270

    schedule for Delta Division

    exclud
    division is $13, 300,000
    occur. (5)
    roject can be assessed.
    30

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