ANSWER ALL QUESTIONS (25 MARKS EACH)
Write your answers in the answer booklet provided, starting your answer to each question on a new page. Number your answers according to the question number, and also enter these numbers on the frontpage of the answer booklet.
1. Dolfin Juice is considering purchasing a new juice bottling machine to
replace an existing one. The new machine will cost $350 000, with a further $10 000 to install, and has a useful life of 4 years. If the new machine is acquired, current asset will increase by $40 000, and current liabilities will increase by $25 000. It has no scrap value at the end of useful life.
The existing bottling machine was purchased 3 years ago, at a cost of $300 000. It has 4 years of useful life remaining. The machine is depreciated using a straight line method, and can currently be sold for $80 000 without incurring any removal or cleanup cost.
The revenues and expenses (excluding depreciation and interest) associated with the new and old machines are given in the table below.
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New Machine
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Old Machine
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Year
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Revenue ($)
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Expenses ($)
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Revenue ($)
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Expenses ($)
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1
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1 100 000
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60 000
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1 000 000
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95 000
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2
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1 100 000
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64 000
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900 000
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95 000
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3
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1 100 000
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70 000
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820 000
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95 000
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4
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1 100 000
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74 000
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750 000
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95 000
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The company has a cost of capital of 10% per annum.
a) Calculate the Net Present Value (NPV) if Dolfin Juice continues to operate the old machine. (9 marks)
b) Determine the initial investment associated with the purchase of the new machine. (4 marks)
c) Using your result in part (b), calculate the Net Present Value (NPV) if Dolfin Juice purchase the new machine. (10 marks)
d) Should Dolfin Juice continue to operate the old machine or purchase the new machine? Explain. (2 marks)
2. a) Golden Sphere Corporation has a $10 000 par value bond with a 4% coupon rate. The bond matures in 10 years. Suppose coupons are paid annually. The required return of the bond is 6%.
(i) Compute the value of the bond. (6 marks)
(ii) Is the bond priced priced at a discount, par or premium?
Explain. (2 marks)
b) GoodApps Inc just paid a $2.25(D0) annual dividend per share.
Investors believe that the dividend is expected to grow at a rate (g) of 3% per annum for the foreseeable future. Assume investors require a rate of return of 8%.
(i) Calculate the current price of the stock. (3 marks)
(ii) If the stock currently trades at $48, would you buy it? (1 mark)
c) PrimMex Ltd has the following capital structure.
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Debt
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Before-tax cost of debt 7.5%. Corporate tax rate 30%.
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Preferred Stock
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6% at par value $30 per share Selling Price is $28, and
Floatation cost $4 per share
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Common Stock
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Current price $25.50 per share
Dividend next period (D1) $2 per share. Growth rate (g) of dividend 5%
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(i) Calculate the cost of debt. (3 marks)
(ii) Calculate the cost of preferred stock. (3 marks)
(iii) Calculate the cost of common stock. (3 marks)
(iv) Calculate the weighted average cost of capital using the following capital structure.
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Source of Capital
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Long term
Debt
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Preferred
Stock
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Common Stock
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Weights
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30%
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30%
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40%
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(4 marks)
3. Turblow Ltd is a manufacturer of industrial fan. The finance manager is
concerned about the firm’s management of working capital.
a) The average collection period and average payment period are 33 days and 30 days respectively. The firm turns over its inventory 15 times each year (assume 365 days year), and currently has annual sales of $105 million.
(i) Calculate the firm’s operating cycle and cash conversion cycle, correct to 1 decimal place. (5 marks)
(ii) Determine the amount of resources needed to support the firm’s cash conversion cycle. (4 marks)
b) Turblow Ltd purchases 150 000 units per year of a component used in industrial fan production. The cost per order is $25, while the carry cost is $12 per unit per year.
(i) Calculate the economic order quantity. (4 marks)
(ii) Using your answer in (i), calculate the ordering cost, carrying cost and total inventory cost. (8 marks)
c) Suppose Turblow Ltd operates a 250 days per year, and maintains a
minimum inventory level of 200 units of safety stock. If the lead time to receive orders ofthe component is 4 days, calculate the reorder point. (4 marks)
4. a) State the FIVE steps in planning personal financial affairs. (10 marks)
b) List any THREE financial plans, and identify the goal associated with each financial plan. (6 marks)
c) The following is an extract of Fanny Han’s financial position as at 31 December 2015.
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Asset ($)
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Liabilities and Net Worth ($)
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Liquid Assets
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38 000
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Total Liabilities
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712 000
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Other Assets
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1 250 000
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Net Worth
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576 000
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Total Assets
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1 288 000
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Total Liabilities and Net Worth
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1 288 000
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Fanny’s Total Liabilities include a $638 000 housing loan and a $56
000 car loan. Her total income for the year 2015 was $145 000.
Calculate the following financial ratios, correct to 2 decimal places
(i) Solvency ratio
(ii) Liquidity ratio
(iii) Gearing ratio (9 marks)