BUACC3701 Financial Management Assignment Help

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      Question:1    Assume also that fractions of investment can be undertaken. I.e. they are divisible.

a)    Which projects should be acquired?

Projects which shall be acquired given the divisibility of these projects are:

 

 

Investment Amount

Cumulative investment

Project B

150,000

150,000

Project D

100,000

200,000

Project A (1/2)

50,000 (1/2 of 100,000)

300,000

 

 

 

b)    What is the total NPV of the projects acquired?

 

   

Project B

Project D

Project A

Project B

Project D

Project A

year

PVF @ 10%

CF

CF

CF

PV

PV

PV

0

1.000

-100000

-100,000

-100,000

-100000

-100000

-100000

1

0.909

-50,000

60,000

20,000

-45454.5

54545.45

18181.82

2

0.826

100,000

60,000

40,000

82644.63

49586.78

33057.85

3

0.751

100,000

100,000

60,000

75131.48

75131.48

45078.89

4

0.683

140,000

 

80,000

95621.88

 

54641.08

   

NET PRESENT VALUE

 

107943.4

79263.71

50959.63

 

TOTAL NPV = 107,943.4 + 79,263.71 + ½ OF 50,959.63 = 212687

 

Now assume that fractions of investment cannot be undertaken.

 

c)    Which projects should be acquired?

 

Investment Amount

Cumulative investment

Project B

150,000

150,000

Project D

100,000

200,000

Project E

50,000

300,000

 

d)    What is the total NPV of the projects acquired?

 

   

Project B

Project D

Project E

Project B

Project D

Project E

year

PVF @ 10%

CF

CF

CF

PV

PV

PV

0

1.000

-100000

-100,000

-50,000

-100000

-100000

-50000

1

0.909

-50,000

60,000

20,000

-45454.5

54545.45

18181.82

2

0.826

100,000

60,000

40,000

82644.63

49586.78

33057.85

3

0.751

100,000

100,000

60,000

75131.48

75131.48

45078.89

4

0.683

140,000

 

40,000

95621.88

 

27320.54

   

NET PRESENT VALUE

 

107943.4

79263.71

73639.1

 

TOTAL NPV = 107,943.4 + 79,263.71 + 73639.1 = 260846.3

 

Assume now that Projects A and E are mutually exclusive and the projects are divisible.

e)    Which projects should be acquired?

 

Investment Amount

Cumulative investment

Project B

150,000

150,000

Project D

100,000

200,000

Project E

50,000

300,000

 

 

f)     What is the total NPV of the projects acquired?

 

TOTAL NPV = 107,943.4 + 79,263.71 + 73639.1 = 260846.3

Project E is preferred over Project A since its outlay is lower and NPV is higher.

 

Question 2:

Black Ltd has identified the following two projects

 

Project

 

Project

 

A

 

B

Year

Cash Flow

 

Cash Flow

0

-100000

 

-140000

1

30000

 

53000

2

35000

 

53000

3

40000

 

53000

4

45000

 

53000

5

55000

 

53000

 

a)    Calculate the Net Present Value for each project.

NPV OF PROEJCT A

year

cash flow

PVF @ 10%

PV

0

-100000

1

-100000

1

30000

0.909

27272.73

2

35000

0.826

28925.62

3

40000

0.751

30052.59

4

45000

0.683

30735.61

5

55000

0.621

34150.67

   

NPV

51137.22

 

NPV OF PROEJCT B

year

cash flow

PVF @ 10%

PV

0

-140000

1.000

-140000.00

1

53000

0.909

48181.82

2

53000

0.826

43801.65

3

53000

0.751

39819.68

4

53000

0.683

36199.71

5

53000

0.621

32908.83

   

NPV

60911.70

 

 

b)    Calculate the Internal Rate of Return for each project.

IRR of Project A

year

cash flow

PVF @ 28%

PV

0

-100000

1

-100000

1

30000

0.781

23437.50

2

35000

0.610

21362.30

3

40000

0.477

19073.49

4

45000

0.373

16763.81

5

55000

0.291

16007.11

   

NPV

-3355.80

 

As the NPV is negative at 28% rate of discount the IRR of the project lies between 10% and 28%. Using method of interpolation, the IRR is approximated as follows:

IRR =

IRR of Project B

year

cash flow

PVF @ 28%

PV

0

-140000

1.000

-140000.00

1

53000

0.781

41406.25

2

53000

0.610

32348.63

3

53000

0.477

25272.37

4

53000

0.373

19744.04

5

53000

0.291

15425.03

   

NPV

-5803.68

 

As the NPV is negative at 28% rate of discount the IRR of the project lies between 10% and 28% (Watson, 2012). Using method of interpolation, the IRR is approximated as follows:

IRR =

c)    Table which can be used for NPV profile

 

Project A

Project B

Discount Rate

NPV

NPV

0%

105000.00

125000.00

10%

$51,137.22

$60,911.70

20%

$13,548.63

$15,418.70

 

d)    Comment on the acceptability and preferability of the projects.

Both Project A and project b can be acceptable since both the projects have positive net present values. However, Project B shall be preferred over Project A as the NPV of the Projects B is higher than that of Project A for a set of discount rates (Brearly , Myers & Allen, 2012).

 

 

 

 

 

 

Question 3:

a)    Determine the breaking points and ranges of total financing associated with each source of capital.

Answer

Weights of Debts, preference shares and equity are assumed to be .4,.2 and .4 respectively.

 

cost

Range of financing

Breaking point

 

Range of total financing

Debts

6.5%

$0-$300,000

$300,000/.4 = $750,000

$750,000

7.5%

$300,001-$600,000

$600,000/.4 = $1,500,000

$1,500,000

9.0%

$600,001 and above

-

Above $1,500,000

Preference shares

9.5%

$0 - $100,000

$100,000/.2 = $500,000

$500,000

10%

$100,001 and above

-

Above $500,000

Equity

11%

$0 to $500,000

$500,000/.4 = $1,250,000

$1,250,000

12.5%

$500,001 to $1,000,000

$1,000,000/.4 = $2,500,000

$2,500,000

14%

$1,000,001 $ above

-

Above $2,500,000

 

b)    Using the data developed in a., determine the levels of total financing at which the firm's weighted average cost of capital (WACC) will change.

Answer

The company’s  weighted average cost of capital (WACC) will change at $500,000 million and $2,500,000 (Watson, 2012).

c)    Calculate the weighted average cost of capital and the weighted marginal cost of capital (WMCC) for each range of total financing found in b.

Answer

Calculation of WACC

Total new financing

Source

Proportion

cost

Weightage cost

0-500,000

Debts

.4

6.5%

2.6%

Preference

.2

9.5%

1.9%

Equity

.4

11%

4.4%

 

 

 

 

WACC = 8.9%

500,000- 2,500,000

Debts

.4

9%

3.6%

Preference

.2

10%

2.0%

Equity

.4

12.5%

5%

 

 

 

 

WACC = 10.6%

Above $2,500,000

Debts

.4

9%

3.6%

Preference

.2

10%

2.00%

Equity

.4

14%

5.6%

 

 

 

 

WACC = 11.4%

 

Calculation of WMCC

Total new financing

WMCC

0-500,000

8.9%

500,000- 2,500,000

10.6%

Above $2,500,000

11.4%

 

 

d)    Using the results of c. along with the information on the available investment opportunities compile the firm's investment opportunities schedule (lOS), plot this schedule and plot the weighted marginal cost of capital.

Answer

Investment

Opportunity

Initial

Investment

IRR

(calculated)

WMCC

A

$200,000

14.00%

8.9%

B

$300,000

12.00%

8.9%

C

$500,000

11.00%

10.6%

D

$300,000

10.00%

8.9%

E

$600,000

9.00%

10.6%

F

$100,000

8.00%

8.9%

 

IOS and WMCC

Project

IRR

initial Investment

cumulative investment

A

14.00%

$200,000

$200,000

B

12.00%

$300,000

$500,000

C

11.00%

$500,000

$1,000,000

D

10.00%

$300,000

$1,300,000

E

9.00%

$600,000

$1,900,000

F

8.00%

$100,000

$2,000,000


 

 

 

 

 

 

e)    Which if any of the available investments would you recommend that the firm accept? Explain your answer.

Answer

Investment opportunities A, B, C and D would be investable and be recommended. This is because all investment opportunities like A, B, C and D have IRR which is much higher than their respective WMCC (Eugene Brigham, 2010).

f)     Assume now that Project C is unavailable. Which if any of the available investments would you recommend that the firm accept? Explain your answer

Answer

If C is not available for investment, then only A. B and D shall be accepted. The other two projects can’t be undertaken because their WMCC is much higher than their IRR and they would reduce the firm market value of undertaken (Damodaran, 2012).

 

 

 

 

 

 

 

 

 

Question 4: Explain the common sources of risk affecting financial managers and shareholders.

Risk can be defined as the chances of occurrence of a loss and decline in value of a financial asset. This can affect individual shareholders as well as firm’s management in general. However, there are some risks which affect both the shareholders and the company’s management. Such events are:

a)      Event risks: some events can occur during a particular period which is not only surprising but unexpected as well. These events can affect the earning capacity of a company significantly. For example, the government of a country can pronounce withdrawal of a general order which mandated production of a specific medicine. This would negatively impact the earnings as the same was not expected by the firm’s management (Brearly , Myers & Allen, 2012).

b)      Exchange rate Risks: Firms which has a significant cash flow from revenue generated in foreign countries can be expected to experience losses of cash flows from fluctuations in the rate of exchange of the currencies involved. Such losses however can be minimised through various measures such hedging etc.

c)      Purchasing power risks: inflation is something which can also impact the power of the shareholders and the firm in general. An increase in inflation would lead to lower purchasing power by the firm and which can significantly lower the power of these firms investing in substantially large new projects. This means new projects would need more borrowings to take effect (Atrill, 2013).

d)      Tax rate Risks: an increase in the corporate tax rate would reduce the cash inflows for the management which can be reinvested. Further higher taxes would lead to lower EPS and lower dividend pay out.

 

 

 

 

 

 

 

 

 

 

Bibliography

Atrill, P. a. M. E., 2013. Accounting and finance for non-specialists. 8th ed. Harlow: Financial Times/Prentice Hall. .

Brearly , Myers & Allen, 2012. Corporate finance. 9th ed. Chicago: McGraw Hill Irwin.

Damodaran, A., 2012. APPLIED CORPORATE FINANCE. FOURTH EDITION ed. Chicago: Wiley Publishers.

Eugene Brigham, 2010. corporate finance. 13th ed ed. Chicago: Mcgrawhill Irwin.

Watson, D. a. H. A., 2012. Corporate Finance Principles and Practice.. 6th ed. Harlow: Pearson Publishers .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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