Reference no: EM132955978

ACC501 Business Accounting And Finance

Assignment 1

Question 1 In the world of corporate finance, the key objective of the firm is often considered to be shareholder wealth maximization.
Required:

(a) Evaluate the reasons for selecting shareholder wealth maximisation rather than profit maximisation as the key objective of the firm.

(b) What is meant by the term ‘agency theory'? Critically comment on how it manifests itself in a business and how it may be alleviated.

Question 2

Triglass plc has three types of capital. The market capitalization of its equity is $20 million. These ordinary shares have a beta of 0.9, as measure over the past five years of monthly returns which may be taken as the appropriate adjustment to the average risk premium. The current risk-free rate on government bonds is 4.5%. The historical equity risk premium is 5% per year. The market value of its irredeemable non-participating non-convertible preference shares is $5 million and the rate of return being offered is 7.5% per year. The debt of the firm amounts to $15 million and costs 6.5% per year before allowing for tax shield benefits. The corporation tax rate is 30%. Calculate the WACC for Triglass plc.

Question 3

Investment is inherently risky; however, the wise investor will seek ways to reduce this risk. One such method is to utilise portfolio theory when planning the investments.

Explain and discuss the concepts behind portfolio theory, clearly identifying any advantages and disadvantages or limitations to this theory.

Question 4

"Stock option grants are good because they motivate executives to act in the best interests of shareholders." Viewpoint A.

"Granting stock options to executives is like allowing a professional footballer to bet on the outcome of games." Viewpoint B.

Discuss the 2 viewpoints.

Assignment 2

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.

Assignment 3

Question 1

i) Explain the role of (a) Corporate Accounting & (b) Corporate Finance in helping the economic growth of a nation.

ii) Is the wealth maximisation goal a short or long-term objective for firms? Explain.

iii) ‘Despite the diversity of financial roles and activities, an understanding of the need for ethics in finance is important in three major areas: Ethics is needed in financial markets, in the financial services industry and by finance people in organisations'. Explain this statement with clear examples.

Question 2

The primary financial objective of a company is stated by corporate finance theory to be the maximisation of the wealth of its shareholders but this objective is usually replaced by the surrogate objective of maximisation of the company's share price.

Required:

a) Discuss how this substitution can be justified.

As stated above in a) the primary financial objective of corporate finance is usually taken to be the maximisation of shareholder wealth.

Discuss what other objectives may be important to a company quoted on a stock exchange and whether such objectives are consistent with the primary objective of shareholder wealth maximisation.

Required:
b) Discuss this aspect generally but also in the light of a consideration that management wishes to keep the financial gearing level as low as possible, while shareholders would prefer it kept as high as possible.

Question 3

Companies finance their long-term needs through two routes, namely equity finance or debt finance.

Required:

Identify and critically discuss the various ways in which companies can access debt & equity finance. Also discuss the particular problems experienced by small companies with regards to this type of finance whilst highlighting any particular financing avenues which may be available to such companies in this respect.

Question 4

Mr Arsenal has the opportunity to invest in the shares of two companies - Tropicana plc and Waterfall plc. Tropicana plc is a tropical leisure wear manufacturer and Waterfall plc manufactures a range of adult and children's waterproof clothing. The return on both these companies is likely to be influenced by the state of the weather. The following table shows the return that can be expected from each company's shares for different weather conditions:

Weather Conditions	Probability of occurrence	Return on Tropicana plc	Return on Waterfall plc
Hot	0.3	30%	-5%
Moderate	0.5	10%	6%
Wet	0.2	8%	40%

Required:

(a) Calculate the expected return and standard deviation of a 100% investment in Tropicana plc.

(b) Calculate the expected return and standard deviation of a 100% investment in Waterfall plc.

(c) Mr Arsenal is also considering combining both shares in a portfolio. Calculate the expected return and standard deviation for both of the following portfolio combinations if the covariance of Tropicana and Waterfall is -99.2

	% Invested in Tropicana plc	% Invested in Waterfall plc
Portfolio 1	50%	50%
Portfolio 2	25%	75%

Explain to Mr Arsenal why investing in a portfolio is beneficial to a risk averse investor. Make reference to appropriate diagrams in your answer.

(d) Critically discuss the following statements about stock market efficiency:

i) The weak form of the efficient market hypothesis implies that it is possible to generate abnormal profit by analysing and finding patterns in part share price movements.

ii) The semi-strong form of the efficient market hypothesis implies that fund managers who study detailed publicly available information about a company, such as financial accounts and newspaper reports should be able to outperform the market.

iii) The strong form of the efficient market hypothesis implies that directors with privileged private information about a company are able to make superior returns.

*Note that "critically discuss" will require students to analyse further and expand comprehensively on the theory of stock market efficiency and not just describe the findings.