Prepare a statement showing the incremental cash flows

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Reference no: EM131347388

1. Analyse fundamental corporate finance decisions and discuss their applications.

2. Apply the investment decision rules of the traditional and discounted cash flow methods in analysing investment decisions and discussing the outputs, while utilising the outputs for investment decisions.

3. Be able to compute cost of capital; discuss and critically evaluate working capital policies and apply cash management models in analysing business working capital policies.

4. Understand the capital structure and the Weighed Average cost of capital as a source of value creation for the Shareholder.

Question 1

Riphean plc and Silurian plc are two businesses operating in different industries from one another. They are both financed by a mixture of ordinary share and loan capital and both are seeking to derive the cost of capital for investment decision making purposes. The following information is available concerning the two businesses for the year to 30 November Year 8:

                                 Riphean plc              Silurian plc

Profit for the year             £3.0m                    £4.0m

Gross dividends                £1 .5m                   £2.0m

Market value per ordinary share   £4.00      £1 .60

Number of ordinary shares            5m          1 0m

Gross interest yield on loan capital   8%          1 2%

Market value of loan capital            £10m     £16m

The annual growth rate in dividends is 5 per cent for Riphean plc and 8 per cent for Silurian plc.

Assume a 30 per cent tax rate.

Required:

(a) Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the information provided.

(b) Discuss two possible reasons why the cost of ordinary share capital differs between the two businesses.

(c) Discuss two limitations of using the weighted average cost of capital when making invest- ment decisions.

Question 2

Company Eclectic Ltd produces a range of central heating systems for sale to builder's merchants. As a result of increasing demand for the business products, the Directors have decided to expand production. The cost of acquiring the new plant and machinery and the increase in working capital requirements are planned to be financed by a mixture of long-term and short-term borrowing. The greater the level of depth in your answer, the higher the number of marks given.

Required:

a) Discuss the major factors that should be taken into account when deciding on the appropriate mix of long-term and short-term necessary to finance the expansion programme.

b) Discuss the major factors that a lender should take into account when deciding whether to grant a long-term loan to the business.

c) Identify three conditions that might be included in a long-term loan agreement and state the purpose of each.

Question 3

Viva Mills is considering expanding its production to a new yarn. The plant is expected to cost £1 million and have a life over five years and a nil residual value. It will be bought, paid and ready for operation on December 31st Year 0. £500,000 has already been spent on development costs of the product and this has been charged in the income statement the year it was incurred.

The following results are projected for the yarn:

 

Year 1 Year 2

Year 3

Year 4

Year 5

Sales revenue

1.2

1.4

1.4

1.4

1.4

Costs, including depreciation

-1

-1.1

-1.1

-1.1

-1.1

Profit before tax

0.2

0.3

0.3

0.3

0.3

Tax is charged at 50% on annual profits (before tax and after depreciation) and paid one year in arrears. Depreciation of the plant has been calculated on a straight-line basis. Additional working capital of £600,000 will be required at the beginning of the project and released at the end of year 5. You should assume that all cash flows occur at the end of the year in which they arise.

Required:

a) Prepare a statement showing the incremental cash flows of the project relevant to a decision concerning whether or not to proceed with the construction of the new plant.

b) Compute the net present value (NPV) of the project using a 10% discount rate.

c) Compute the payback period to the nearest year. Explain the meaning of this term.

Question 4

Write a 2000-word report explaining:

1. The validity of the CAPM formula including main advantages and drawbacks for Beta.

2. Include examples of companies with high and low betas and high/low levels of risk. Mention at least one company with high risk but low Beta and explain why this happens.

3. Relate the above with the concepts of volatility and correlation. Use the formula of Beta if appropriate.

4. Relate the above with the Black Scholes model and the use of options to predict volatility.

5. Mention the current ERP in the United States or in another developed country of your choice. It is mandatory to use valuable sources (don't use Wikipedia) and its relationship with the time of study.

6. Comment on he importance of choosing the right risk free rate in terms of maturity and reasons why this is important.

7. Give a recommendation of which cost of equity formula to use. Justify your answer.

Verified Expert

This assignment deals in having an in-depth knowledge about the capital budgeting techniques along with CAPM Model. This assignment is both theoretical as well as a mathematical assignment. To complete this project it is essential to study scholar articles as well as web articles which show recent results and description of the subject.

Reference no: EM131347388

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Reviews

inf1347388

7/26/2018 3:06:56 AM

Hello, please I need the referencing to be the correct APA standard. Total word count 3,500 (+/- 10%). Thank you. Do you need me to send my school material, pdf? This is a good effort, you have addressed the main topics and have in general organised the paper in a logical manner. In addition you have identified some good references. Your paragraph structure is also good in places, nowhere you went beyond the topic to manage the words limit. Overall it was really good if you don’t go beyond the topic.

len1347388

1/9/2017 6:05:38 AM

Generic skills: communication and presentation Comprehensive and correctly structured assessment. Style of writing is very fluent and develops a coherent and logical argument. Excellent referencing. Knowledge & Understanding Demonstrates excellent knowledge of theory and provides critical theoretical underpinning. Very good interpretations and summarising of main themes. Analysis Excellent use of theoretical and conceptual models to guide analysis linked with a critical discussion of main themes. Deconstructs the major themes used in the argument. Synthesis/ Creativity/ Application Logical presentation of themes with appropriate examples being demonstrated. Very good demonstration of synthesis. Models have been clearly applied to the argument. Evaluation Shows clear evidence of in-depth critical reflection and evaluation of the argument by providing a robust defence of the opinions presented in the assessment.

len1347388

1/9/2017 6:05:26 AM

Please read all questions and information provided carefully. Answer should be made in appropriate length keeping in view the requirement of each question and total word counts allowed. In addition, your assignment should demonstrate the following qualities: • A critical appreciation of relevant literature and its use to support argument, substantiate calculations and other aspects of the assignment. • Taking ownership of the content, being prepared to debate and argue a personal position, and providing evidence of evaluative skills. A submission made up of extracts from published sources that is descriptive or simply just theoretical regurgitation is not acceptable. Your submission must have interpretation and consideration of the challenges and issues of taking theory into practice.

len1347388

1/9/2017 6:05:19 AM

If it's not too much trouble read all inquiries and data gave precisely. Answer ought to be made in proper length keeping in view the necessity of every question and aggregate word numbers permitted. Also, your task ought to exhibit the accompanying qualities: • A basic energy about significant writing and its utilization to bolster contention, substantiate counts and different parts of the task. • Taking responsibility for substance, being set up to level headed discussion and contend an individual position, and giving confirmation of evaluative aptitudes. An accommodation made up of concentrates from distributed sources that is enlightening or basically quite recently hypothetical spewing forth is not worthy. Your accommodation must have elucidation and thought of the difficulties and issues of taking hypothesis into practice.

len1347388

1/9/2017 6:05:05 AM

Please the deadline for submission is 11:59pm today, I need urgent help The APA referencing system, 6th edition, must be used. Please note that Wikipedia is NOT a scholarly source and should not be used in academic and scholarly papers or in discussion postings as citation sources. 1. Analyse fundamental corporate finance decisions and discuss their applications. 2. Apply the investment decision rules of the traditional and discounted cash flow methods in analysing investment decisions and discussing the outputs, while utilising the outputs for investment decisions. 3. Be able to compute cost of capital; discuss and critically evaluate working capital policies and apply cash management models in analysing business working capital policies. 4. Understand the capital structure and the Weighed Average cost of capital as a source of value creation for the Shareholder.

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