BUACC5936:Financial Management 2019 S2

ASSIGNMENT

QUESTION ONE CASH FLOW ANALYSIS (5 marks)The Board of Directors of National Brewing Inc. is considering the acquisition of a new still.The still is priced at $600,000 but would require $60,000 in transportation costs and $40,000for installation. The still has a useful life of 10 years but will be depreciated using straight-linedepreciation over the next 5-years. It is expected to have a salvage value of $10,000 at the endof 10 years. The still would increase revenues by $120,000 per year and increase yearlyoperating costs by $20,000 per year. Additionally, the still would require a $30,000 increasein net working capital. The firm’s marginal tax rate is 30 percent, and the project’s cost ofcapital is 10 percent. Should the new equipment be acquired according to NPV analysis?QUESTION TWO RISK AND RETURN (5 marks)During the past 5 years, the stock of Euroflop has moved as follows:

Year

1

2

3

4

5

Price change, %

+20

-10

-30

+5

+15

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Calculate the variance and the standard deviation of the returns of Euroflop.QUESTION THREE TIME VALUE OF MONEY (5 marks)A newly divorced father of two, looking to improve his image wants to purchase a Mercedes-Benz inorder to impress his young and foxy girlfriend. The car costs $17,999 and the car yard is willing tooffer financing. The terms of the deal include a $2000 deposit (which the client has) with the remainderof the balance being repaid in equal monthly installments over the next three years. The car dealercharges 1.25 percent interest rate per month on the balance of the outstanding loan.Required: Calculate the size of each monthly payment and then prepare a loan amortisation scheduleto show that as time passes the amount paid in interest by your client is reduced.QUESTION FOUR TIME VALUE OF MONEY (5 marks)A small business entrepreneur is interested in leasing new office space that requires animmediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years.Assume a discount rate of 14%.Required: Calculate the present value of this stream of lease payments?QUESTION FIVE THE COST OF CAPITAL (5 marks)Floorstreet Stock Raiders Incorporated (FSR) has the following capital structure, which isconsiders to-be optimal:

DebtPreferred StockCommon Equity

25%15%60%

100%

FSR’s expected net income this year is $34,285.72, its established dividend payout ratio is 30percent, its corporate tax rate is 40 percent, and investors expect earnings and dividends togrow at a constant rate of 9 percent in the future. FSR paid a dividend of $3.60 per share onits 76,000 issued ordinary shares and is currently trading at a price of $54 per share. FSR canobtain new capital in the following ways:

Preferred: Issue 10,800 new preference shares committing FSR’s to a dividend of $11.The preference shares can be sold to the public at a price of $95 per share.Debt: Issue 1,800 ten year $1,000 par value bonds to the public. The bonds will pay11.115% coupons (annually) and have a current yield to maturity of 12%.

(a)(b)(c)(d)

Confirm that the allocated weights above are correct.Determine the cost of each capital structure componentCalculate the weighted average cost of capital.Given the following investment opportunities. Which projects should FSR accept?Why?

PROJECT

COST at t=0

RATE OFRETURN

A B C D E

$10,00020,00010,00020,00010,000

17.4%16.0%14.2%13.7%12.0%

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