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Capital Budgeting
Qantas’s wishes to further develop their frequent flyer loyalty program by introducing a range of leisure facilities to their members. It is considering investing in one of two projects, developing a golf course on the Gold Coast or purchasing a casino in Perth. The golf course on the Gold Coast requires an initial investment now 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 starting 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 course will be sold for $ 0.6m. Qantas is able to claim an annual depreciation of $0.15m from years 1 to 5 and pays tax at 30%. The casino in Perth requires one-off initial investment of $ 5m now and will generate cash inflows of $0.6m starting end of year 1, $1.8m each in years 2, 3 and 4 increasing to $ 2m every year for the next 4 years. The Casino will be sold at the end of this for $ 0.4m; Qantas will not qualify for any depreciation on this project and will pay tax at 30%. a) Calculate the Net Present Value (NPV) for each of the two investment options, assume that the WACC for Qantas is 10%. (Do NOT use the WACC you have calculated in the earlier questions. 10 marks) b) Which investment will you recommend for Qantas? (5 marks) c) Qantas is also considering investing in the Venezuelan oil industry as an alternative. Given the recent economic hardships in Venezuela (See Source 5), Venezuelan government is looking to privatise portions of the country’s oil industry. Venezuelan government offered to sell one oil field to Qantas. Assume that the NPV for the oil field project is higher than that of the gold course and the casino under the same WACC of 10%. Should Qantas invest in the oil field instead of the gold course and the casino? What could be the potential dangers? What adjustments in terms of discount rate would you recommend? (Discuss the adjustment directions and the reasons, no calculations needed, 10 marks)
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Net Present Value
Case Analysis 3 – Weight 40% of total assignment You are the General Manager at the Bicker, Slaughter, and Lynch Law Firm. There is an opportunity to buy out a small law firm that was just started by a young MBA/JD, and you believe the firm can be grown and become a lucrative part of your Firm. With help from your finance leader, you have estimated the following benefit streams for this new division: You estimate that the purchase price for this firm would be $200,000 and that additional net working capital would be needed in the amount of $60,000 in year 0, an additional $20,000 in year 2 and then $20,000 in year 5. BSL usually spend about $275,000 per year in advertising. If you make this acquisition, you would ask that advertising spending be increased by an incremental one-time amount of $50,000 in year 0 to publicize the firm’s expansion. Your finance leader has indicated that the firm has access to a credit line and could borrow the funds at a rate of 6%. He also mentions that when he runs project economics for capital budgeting (such as a new copier or a company car), he recommends a standard 10% rate discount, but the one other time they looked at an acquisition of a smaller firm, he used a 12% rate discount. Obviously you will want to select the most appropriate discount rate for this type of project. At the end of 8 years, the plan will be to sell this division. The estimated terminal value (the sale and the return of working capital) is conservatively estimated to be $300,000 of after-tax cash flow help. Using the data that you need (and ignoring the extraneous information), calculate the Nominal Payback, the Discounted Payback, the Net Present Value, and the IRR for this potential acquisition. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Before Tax Cash Flow From Operations $(149,000) $0 $51,380 $88,760 $114,100 $129,780 $143,640 $167,300 After Tax Net Income From Operations $(103,500) $(50,500) $36,700 $63,400 $81,500 $92,700 $102,600 $119,500 After Tax Cash Flow From Operations $(85,600) $15,000 $48,600 $72,200 $95,550 $101,300 $125,200 $140,200 JWI 530: Financial Management I Assignment 2 ©2016 Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 530 Page 4 of 5 Discussion – in a Word Document in paragraph form, respond to the following: 1)From a purely financial (numbers) perspective, would you recommend this purchase tomanagement? Why? 2)What are some of the non-financial elements that need to be considered for this proposal? 3)Assumptions in project economics can have a huge impact on the result. Identify 3 financialelements/assumptions in your analysis that would make this project not be financially attractive(e.g., answer this question: what would have to be true for this to be a bad investment?). 4)If you were the CEO, would you approve this proposal? Why or why not?
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Corporate Finance
Your factory has been offered a contract to produce a part for a new printer. The contract would last for five years and your cash flows from the contract would be $3 million per year. Your upfront setup costs to be ready to produce the part would be $6.5 million. Your cost of capital for this contract is 10%. a. What does the NPV rule say you should do? b. If you take the contract, what will be the change in the value of your firm? what is the payback period?
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ROI
Question 3 (6 marks) Enrod PLC has two divisions: Old and New. Its summary results are: Old New Investment 2,000,000 5,000,000 Net profit 400,000 900,000 Enrod’s cost of capital is 16%. Compare the performance of the two divisions under both ROI and Residual income measures (4 MARKS). In which division should Enrod invest more capital and why? (2 MARKS)
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Net Present Value
Explain the NPV rule and provide an example. How is the IRR related to the NPV analysis and why is the IRR a popular alternative to the NPV? Select one of the other capital budgeting tools discussed this week and explain how it provides additional helpful information that the NPV or IRR tools might not adequately capture
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Financial Statements
Assignment Task Three In no more than 1,500 words: a) Identify and discuss the purpose of the two main financial statements shown below for J D Wetherspoons plc. (AC4.1) b) Evaluate why different formats of financial statements are used for different types of business. (AC4.2) c) Using the financial statements detailed below, for J D Wetherspoon plc, calculate a series of profitability ratios and liquidity ratios, analyze and interpret the results that you achieve and comment on the company’s performance. (AC4.3)
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Efficient Market Hypothesis
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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Valuation
Project 4 Forecasting and FCF Valuation Prepare a spreadsheet forecast of FCFs and a valuation for your company similar to what we did for Chapter 9 Problem 11. Show cell references in your calculations. Chapter 9 Problem 11 spreadsheet is provided as reference.
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Market Perspective
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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Portfolio
Question 4 (15 marks) You have a portfolio with a standard deviation of 30% and an expected return of 18%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing portfolio, which one should you add? Why? Explain. Expected Return Standard Deviation Correlation with Your Portfolio’s Returns Stock A 15% 25% 0.2 Stock B 15% 20% 0.6
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