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Capital Budgeting
Chapter 26 Checkpoint Problem Invescom is considering investing $450,000 in plant assets. The plant assets have a useful life of 9 years and no salvage value. The plant assets are expected to generate an annual cash savings of $85,000. The company's cost of capital is 12%. REQUIRED: A. Determine the cash payback period B. Determine the accounting rate of return C. Determine the net present value. D. Determine the internal rate of return. E. What is meant by cost of capital?
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Capital Budgeting
Critical Thinking Problem – determine Simple Rate of Return, Payback Method, Net Present Value, Internal Rate of Return, and Decision Making (25 points). In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After careful study, Mr. Duncan has determined the following: a. A building in which an auto wash could be installed is available under a five-year lease at a cost of $1,700 per month. b. Purchase and installation costs of equipment would total $200,000. In five years, the equipment could be sold for about 10% of its original cost. Depreciation in done using the straight-line method over its useful life. c. An investment of an additional $2,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. d. Both a car wash and a vacuum service would be offered with a wash costing $2.00 and a vacuum costing $1.00 per use. e. The only variable costs associated with the operation would be $0.20 per wash for water and $0.10 per use of the vacuum for electricity. f. In addition to rent, monthly costs of operation would be: cleaning, $450; insurance, $75; and maintenance, $500. g. Gross receipts from the car wash would be about $1,350 per week. This would be 675 car washes per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum. There would be 405 vacuum uses (675 * 60%) per week Mr. Duncan will not open the car wash unless it provides at least a 10% return. Required: 1. Assuming that the car wash will be open 52 weeks a year, compute the expected net annual cash receipts (gross cash receipts less cash disbursement) from its operation. Do not include the cost of the equipment, the working capital, or the salvage value in these computations. Use the template below!
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Capital Budgeting
The following 2 mutually exclusive projects (Project Maringa and Project Nelli) are available: Year/s Cash Flows (Maringa) Cash Flows (Nelli) 0 -200 000 -20 000 1 18 000 10 000 2 28 000 9 000 3 28 000 10 000 4 300 000 8 000 NOTE: a. The company requires a rate of return of 15% on its investment. b. Salvage values for the projects are as follows: * Project Maringa R10 000 (sold as scrap). * Project Nelli R1 000 (sold as scrap) Required: 1.1. Applying the payback rule, determine which the more lucrative project is. (5) 1.2 Explain why this method would not be used as the sole decision tool when making a capital investment decision. (4) 1.3 If the Accounting Rate of Return (ARR) is used, which project is more viable? (5) 1.4 Determine which project is more lucrative if the NPV rule is applied (All workings to be shown). (14) 1.5. Which method is most reliable? Why? (2)
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Corporate Finance
A. List and briefly describe the three general areas of responsibility for a chief financial officer (CFO) of a selected non-financial company which is listed on Australian Stock Exchange (ASX). Explain how those responsibilities can affect ultimate objective of the company. The name of company you choose should start with the first letter of your first, last or middle name. (1500 words) B. “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not the case. (500 words).
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Corporate Finance
Project 1 Calculating FCF and ROIC Use five years Compustat data for your company to compute or find the following for each of the five years: 1. NOPAT 2. Operating CA 3. Operating CL 4. NOWC 5. Net PPE 6. Total Operating Capital 7. Change in TOC 8. ROIC 9. FCF 10. Uses of FCF Use cell references for your computations. Project 1 Format is an example file.
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Corporate Finance
Part 1: Company financials [45 marks] Through 2014-2016 financial performance of Qantas has seen a major turnaround (refer to Source 1, 2 and 3). a) On Page 24 of the 2016 Preliminary Final Report shows a Return on Invested Capital (ROIC) of 16.2% in FY15 and 22.7% for FY16 (calculations showing how these figures have been derived is detailed in subsequent pages). What are the main contributing factors to this improved operating result? Explain in detail. You may want to do some research of your own, present and cite your own findings where applicable. (15 marks) b) Based on the 2016 Preliminary Final Report (Source 2) consolidated financial statements, calculate average interest bearing debt levels, average total equity and cost of debt for the financial year 2015-2016. Clearly state any assumptions. (10 marks) c) Use Yahoo Finance and other sources, find beta and market premium. Based on your knowledge of either the Capital Asset Pricing Model (CAPM) and derive an appropriate cost of equity. Clearly state any assumptions. (10 marks) d) Calculate the weighted average cost of capital (WACC) for Qantas. (5 marks) e) For the year ended June 2016 Qantas paid more than $500m to buy back shares. Explain possible reasons for Qantas to follow such a course of action? (5 marks)
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Capital Budgeting
Case Analysis 1 – Weight 20% of total assignment You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans. Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 6% interest, compounded annually. A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows: Year Projected Cash Flow 1 $94,000 2 $114,000 3 $134,000 4 $114,000 5 $94,000 Based on this information, answer the following questions: 1)How much money will be in the bank account if you leave the $300,000 alone until you need it in fiveyears? 2)If you undertake the investment opportunity, what is the Nominal Payback Period? 3)Using the factors for 6%, what is the Discounted Payback Period? 4)What is the Net Present Value of this investment opportunity? 5)Which option – make the investment or leave the money in a savings account – would yourecommend to your CEO? Why? What additional factors/information might make you change yourpoint of view?
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Corporate Finance
Part 2: Raising capitals [15 marks] Assume that Qantas is evaluating financing options for the investment in aircraft cabins and Wi-Fi through the issue of corporate bonds. Qantas is exploring issuing $100m bonds of face value $1000, a coupon rate of 5.5% paid semi-annually, with a maturity period of 10 years. If yield to maturity is 6%: a) Calculate the value of the bond (5 marks) b) Assume that the cost of existing debt and equity from part 1 b) and c) are unchanged, calculate the new WACC (5 marks) c) If Qantas issues convertible bonds instead, how would the yield change from the current 6%? Why? (Discuss the direction of change and the reasons, no calculations required, 5 marks) Part 4: Market perspectives [5 marks] a) Qantas announced the full year result 2016 (See Source 1) at 8:42am on 24th August 2016. Considering the share price movements from 23rd-25th August 2016, what would be the implications to the efficient market hypothesis? Which version of the efficient market hypothesis does this event imply? (5 marks)
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Cost of Capital
ABM company has 50 million shares outstanding. If ABM’s shares are trading at $19.16 per share, (i) what is the company’s market capitalization (value of equity?). Assuming the market value of debt equal today’s book value of debt; (ii) what percentage of the company’s enterprise value is attributable to debt and what percentage is attributable to equity, Using these weights ; (iii) compute the weighted average cost of capital. Assume the pretax cost of debt is 8% , the cost of equity 12% , and the marginal tax rate is 25 percent. The company has on its balance sheet as of today is $200 million in debt and $308.5 million in equity.
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Cost of Capital
Part 1: Company financials [45 marks] Through 2014-2016 financial performance of Qantas has seen a major turnaround (refer to Source 1, 2 and 3). a) On Page 24 of the 2016 Preliminary Final Report shows a Return on Invested Capital (ROIC) of 16.2% in FY15 and 22.7% for FY16 (calculations showing how these figures have been derived is detailed in subsequent pages). What are the main contributing factors to this improved operating result? Explain in detail. You may want to do some research of your own, present and cite your own findings where applicable. (15 marks) b) Based on the 2016 Preliminary Final Report (Source 2) consolidated financial statements, calculate average interest bearing debt levels, average total equity and cost of debt for the financial year 2015-2016. Clearly state any assumptions. (10 marks) c) Use Yahoo Finance and other sources, find beta and market premium. Based on your knowledge of the Capital Asset Pricing Model (CAPM) and derive an appropriate cost of equity. Clearly state any assumptions. (10 marks) d) Calculate the weighted average cost of capital (WACC) for Qantas. (5 marks) e) For the year ended June 2016 Qantas paid more than $500m to buy back shares. Explain possible reasons for Qantas to follow such a course of action? (5 marks)
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