Reference no: EM132955982
ACC501 Business Accounting And Finance
Assignment
Question 1
The Garden Division of Chelsea plc has been allocated $600,000 on investment projects for the coming year. Four projects, each with a four year life and with the following cash flows are currently being considered:
|
Year
|
0
|
1
|
2
|
3
|
4
|
|
Project
|
$k
|
$k
|
$k
|
$k
|
$k
|
|
A
|
-300
|
100
|
10
|
200
|
200
|
|
B
|
-200
|
0
|
0
|
0
|
400
|
|
C
|
-100
|
0
|
0
|
80
|
80
|
|
D
|
-150
|
60
|
60
|
60
|
60
|
Required:
(a) Distinguish between hard and soft capital rationing.
(b) Assuming that the projects are divisible recommend to the Board, which projects should be accepted using the Net Present Value method and evaluate the total net present value that would be generated?
(c) Discuss the impact on your analysis if each project is indivisible.
Question 2
Nike Ltd has issued share capital of 4 million ordinary shares, with a par value of $1 each share. The board of the company has accepted the proposal for a new venture and therefore needs to raise $2 million.
The finance director has suggested that this finance be raised by way of a 1 for 4 rights issue which will be priced at a 30% discount to the current market price of $3 per share.
Required:
a) Calculate the theoretical ex-rights price per share;
b) Calculate the cash raised;
c) Calculate the value of the rights.
The finance director also recommended having the rights issue underwritten by an investment bank or relevant finance house at the time of issue.
d) Explain underwriting and consider whether underwriting is a valid expense at this time
e) An investment bank sponsoring an issue will usually charge a fee of between 2-4% of the issue proceeds and then pays part of that fee, 1.25-3% of the issue proceeds, to sub- underwriters.
What is the maximum fee that Cheltenham would accept as an underwriting fee if they wish to raise the required amount, net of underwriting costs?
f) Explain why, in general, rights issues are priced at a discount to the prevailing market price of the shares;
g) Calculate and discuss the factors that determine whether the actual ex-rights share price is the same as the theoretical ex-rights share price.
Question 3
Arsenal Projects plc wishes to invest in a new product area. The project will last 8 years and the equipment which cost $1,500,000 will have no disposable value at the end of the project.
It is planned that the outcome will be:
Sales volume: 24,000 units per year
Sales price: $65.00 per unit Variable direct costs: $53.00 per unit
There are no other costs. Taxation and inflation can be ignored for this case.
Required:
(a) Calculate the Internal Rate of Return (IRR) of this project based on these estimates.
(b) Management is very conscious of the possibility that some of the assumptions may change and, therefore, requires a review of the project's IRR using sensitivity analyses.
Calculate revised IRRs assuming that sales volume increases by 5%, then assume that sales price increases by 5% and, finally, assume that the cost sales increases by 5%.
(c) Critically review the findings in b) above and discuss which of the variable data should be monitored more closely and why.