$9.99
Capital
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? (no calculations required, 5 marks)
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Capital Budgeting
Case Analysis 2 - Weight 30% of total assignment The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery. After talking to the supplier and meeting with your Engineers and Financial Analysts, you’ve gathered the following pieces of data: Cost of Machine: $150,000 Estimated Annual After Tax Cash Flow Savings: $65,000 (which may or may not grow) Estimated machinery life: 3-5 years (after which there will be zero value for the equipment and nofurther cost savings) You seem to recall that Dynamic’s Finance organization recommends either a 10% or a 15%discount rate for all Cost Savings Projects. From your JWMI MBA, you understand that you need to understand the project financials to ensure that this investment will be economically attractive to Dynamic Manufacturing’s shareholders. Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR (so 4 answers for each scenario) assuming: Alice (A) recommends using the base assumptions above: 3 year project life, flat annual savings,10% discount rate Bill (B) recommends savings that grow each year: 3 year project life, 10% discount rate and a10% compounded annual savings growth in years 2 & 3. In other words, instead of assumingsavings stay flat, assume that they will grow by 10% in year 2, and then grow another 10% overyear 3 in year Carla (C) believes we use a higher Discount Rate because of the risk of this type of project: 3year project life, flat annual savings, 15% discount rate. Danny (D) is convinced the machine will last longer than 3 years. He recommends using a 5 YearEquipment Life: 5 year project and savings life, flat annual savings, 10% discount rate. In otherwords, assume that the machine will last 2 more years and deliver 2 more years of savings. Discussion – in a Word Document in paragraph form, respond to the following: 1)Which person’s scenario would you present to management and why? From a strictly financial(numbers) perspective, would you recommend this purchase to management? 2)In your opinion, which person’s scenario is the most aggressive (i.e., is based on the mostaggressive assumptions)? If you were to select this scenario as the basis for your proposal, howwould you justify the more aggressive assumptions? 3)In SIMPLE English (as in talking to a non-Finance and non-MBA person), explain why there isvalue to management in running all 4 of these scenarios. 4)Beyond financial measures, what other considerations would you want to consider, before makinga recommendation to management? 5)If you were the CEO, would you approve this proposal? Why or why not?
$9.99
Capital
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)
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Stock Price
Question 2 (15 marks) Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on Storico stock is 13 percent per annum, what will a share of Storico’s stock sell for today?
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Capital Budgeting
Question 2 (12 marks) Mammoth Computing is considering an investment of $2.3 million in new equipment. The predicted cash inflows and outflows are: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Capital investment -2,300,000 Inflows 800,000 1,000,000 1,200,000 1,100,000 900,000 Outflows -300,000 -250,000 -300,000 -400,000 -500,000 An alternative investment is for $2 million, the predicted cash inflows and outflows being: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Capital investment -2,000,000 Inflows 700,000 900,000 1,100,000 1,000,000 800,000 Outflows -300,000 -250,000 -300,000 -400,000 -500,000 Mammoth depreciates its equipment over 5 years and uses a cost of capital of 12%. a. For each of the investment alternatives, calculate the i. Net present value (2 MARKS) ii. Payback period (2 MARKS) iii. Accounting rate of return (on an average basis, not per year) (2 MARKS), and iv. Recommend, with reasons, which of the investment proposals should be approved. (2 MARKS) b. Compare and contrast net present value, payback and accounting rate of return as methods of capital investment appraisal. What are the strengths and limitations of each method? (4 MARKS)
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Time Value of Money
Explain the concept of the Time-Value-of-Money and provide an example. If you won the lottery and had a choice between taking a lump-sum payment today or a 10 year annuity, how would the TVM help you in making this decision? What information would you need to make a decision
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Cash Flow
Assignment Task Two Poole Ltd is considering investing some of their capital in new premises. This will entail capital expenditure of some £1,000,000. This new project is set to last for ten years and is likely to attract the following budgeted inflows (money coming into the business) and budgeted outflows (money going out of the business): Years Cash Inflows Cash Outflows £’000 £’000 0 0 1000 1 110 30 2 120 35 3 130 40
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Cost of Capital
Use the following information about Red Rock Corporation Ltd.’s capital structure to answer the questions below; Red Rock’s capital structure is made up of; EQUITY DEBT Preference Shares Ordinary Shares Bonds
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Capital Budgeting
Option 1: Expanding their jet services to regional Australia. The new jet services require an initial investment of $ 1.8m and further investments at the end of years 1, 3 and 5 of $ 1.2 m each. In addition, it will also incur working capital expenses at the beginning of the project of $0.4 m and recover these at the end of year 8. The Golf course will generate cash inflows of $ 0.8 m at the end of year 1, $1.6m each in years 2, 3 and 4 and $ 1.8m each through years 5 to 8. At the end of year 8 the service will be sold for $ 0.6m. Qantas is able to claim an annual depreciation of $0.15m from years 1 to 5 and pays Australian company tax at 30%. Option 2: Given the recent economic trouble in Venezuela (See Source 5), its government is looking to privatise portions of the country’s oil industry. One of the oil fields in Venezuela requires one-off initial investment of $ 5m now and will generate cash inflows of $0.6m at the end of year 1, $1.8m each in years 2, 3 and 4 increasing to $2m every year for the next 4 years. The oil field will be sold at the end of this for $ 0.4m. Qantas will not qualify for any depreciation on this project and will pay Australian company tax at 30%. Venezuelan government promises to charge no tax for this project. a) Calculate the Net Present Value for each of the two investment options, assume that the WACC is 10%. (10 marks) b) Which investment will you recommend for Qantas? (5 marks) c) Considering the choice of WACC as the discount rate for both projects, what could be the potential dangers? What adjustments in terms of discount rate would you recommend? (answer qualitatively, no calculations needed, 10 marks)
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WACC
Project 3 WACC For your company find: 1. The capital structure 2. The pre and after tax cost of debt 3. Beta 4. The risk-free rate 5. The market risk premium 6. The cost of equity capital 7. The weighted average cost of capital (WACC). Define 1 through 7 and identify your sources. Show all calculations. Use the WACC to complete the valuation in Project 4.
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