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There are 2 million shares in issue. ! ! ! ! ! ! ! ! ! ! Calculate the increase in shareholder wealth for each year: II. Per share III. As a percentage IV. For the business as a whole
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EPS - Illustration 2
2010 $000 PBIT Interest Tax Prot After Tax Preference Dividend Dividend Retained Earnings 2000 200 300 1500 300 800 400
5000 3000
5000 3100
Share Price
$2.50
$2.80
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If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2010 Q4 Part (d) June 2010 Q4 Part (c)
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Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings
3000 2000 1000 300 200 500 100 120 280 100 180
3500 2400 1100 350 250 500 150 90 260 110 150
Share Price
$3.30
$4.00
$2.20
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Using the information on the previous page calculate and comment on the following Ratios: I. Return on Capital Employed II. Return on Equity III. Gross Margin IV. Net Margin V. Operating Margin VI. Revenue Growth VII. Gearing VIII. Interest Cover IX. Dividend Cover X. Dividend Yield XI. P/E Ratio
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If youve successfully answered all of the above questions then youre ready to do the exam question below: June 2009 Q4 (a)
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Rights Issue - Illustration 1 XYZ Ltd. intends to raise capital via a rights issue. The current share price is $8. They are offering a 1 for 4 issue at a price of $6. Calculate the Theoretical Ex-rights Price.
Rights Issue - Illustration 2 ABC Ltd. has decided to raise capital via a rights issue. The share price is currently $5.50 and ABC intends to raise $5m. There are currently 6.25m shares in issue and ABC is offering a 1 for 5 rights issue. Calculate the Theoretical Ex-Rights Price.
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Working Capital Illustration Balance Sheet $000 ASSETS Non Current Assets Inventory Receivables Cash 1000 300 200 300 1800 LIABILITIES Ordinary Shares Reserves Long term Liabilities Payables Overdraft 800 200 700 100 1800 Income Statement $000 Revenue COS Gross Prot Other Costs Net Prot Other Information: All sales are made on credit. Required: Calculate the Cash Operating Cycle for Inter Ltd. 1000 800 200 100 100
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Working Capital Illustration Part II Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to:
30 270
Working Capital Illustration Part III Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to:
Days 90 30
60 60
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Receivables - Illustration 1 Credit sales: 1200 3 month credit terms Overdraft rate = 10% New Policy 2% discount if paid in less than 10 days 2 month terms for everyone else. 20% will take the discount
Receivables - Illustration 2
Receivables are currently $4,600,000. Sales are $37,400,000 A factor has offered to take over the administration of trade receivables on a non-recourse basis for an annual fee of 3% of credit sales. The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will save $100,000 per year in administration costs and $350,000 per year in bad debts. A condition of the factoring agreement is that the factor would advance 80% of the face value of receivables at an annual interest rate of 7%. The current overdraft rate is 5%
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EOQ - Illustration 1 Demand of 1200 units per month. Cost of making an order of $12. Cost of one unit $10. Holding cost per year of 10% of the purchase price of the goods. Calculate the EOQ & check that it is correct.
Company orders when the level of stock reaches 50,000 It takes 4 weeks to receive new stock from the time of ordering. The company uses 7,500 units on average per week. Calculate the buffer stock.
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Dec 07 Exam Question The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is 250, while the cost of holding a unit in stores is 050 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year. Calculate EOQ with buffer stock
Demand is 1000 units per month. Purchase cost per unit 11. Order cost 30 Holding cost 10% p.a. of stock value. Required Calculate the minimum total cost with a discount of 1% given on orders of 1500 and over
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A business expects to move 500,000 from its interest bearing account into cash over the course of one year. The interest rate is 7% and the cost of making a transfer is $250. How much should the business transfer into cash each time it makes a transfer?
Using the information in illustration 1 calculate the total cost to the business each year of their cash management policy.
Subsonic Speaker Systems (SSS) has annual transactions of $9 million. The xed cost of converting securities into cash is $264.50 per conversion. The annual opportunity cost of funds is 9%. What is the optimal deposit size?
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If a company must maintain a minimum cash balance of 8,000, and the variance of its daily cash ows is 4m (ie std deviation 2,000). The cost of buying/ selling securities is 50 & the daily interest rate is 0.025 %. Calculate the spread, the upper limit & the return point
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ARR - Illustration 1 ABC Ltd are considering expanding their internet cafe business by buying a business which will cost $275,000 to buy and a further $175,000 to refurbish. They expect the following cash to come in: Year Net Cash Prots () 1 45,000 2 75,000 3 80,000 4 50,000 5 50,000 6 60,000 The equipment will be depreciated to a zero resale value over the same period and, after the sixth year, they can sell the business for $200,000 Calculate the ARR or ROCE of this investment
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Relevant Cash Flow Criteria - Illustration 2 A business is considering investing in a new project. They have already spent $20,000 on a feasibility study which suggests that the project will be protable. The headquarters of the company has spare oor space which will be allocated to the project with $7,000 of the current monthly rent allocated to the project. New equipment costing $2.5m will have to be bought and will be depreciated on a straight line basis over 10 years. A manager who earns $30,000 per year and currently runs a similar project will also manage the new project taking up 25% of his time. State whether each of the following items are relevant cash ows and explain your answer. I. II. The cost of the feasibility study. The rent charged to the project.
III. The new equipment. IV. The depreciation on the new equipment. V. The Managers salary.
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Payback Period - Illustration 3 Initial Investment of $5.8m. Annual Cash Flows of $400,000. Calculate the Payback Period.
Payback Period - Illustration 4 Initial Investment of $6.2m. Cash Flows of: Year 1: ! Year 2:! Year 3:! Year 4:! $1,200,000 $2,200,000 $2,500,000 $1,700,000
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Discounted Cash-ows - Illustration 5 An investor wants a real return of 10%. Ination is 5% What is the MONEY/NOMINAL rate required?
Discounted Cash-ows - Illustration 6 A company undertakes a project with the following cash-ows:
Year 1 2 3 4 5 6
The company has a cost of capital of 10%. Calculate the present value of the cash ows for each of the six years and in total.
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Discounted Cash-ows - Illustration 7 A company undertakes a project with the following cash-ows:
Year 1 2 3 4 5 6
The company has a cost of capital of 10%. Calculate the present value of the total cash ows for the six years
Discounted Cash-ows - Illustration 8 A company expects to receive $100,000 per year forever. Their cost of capital is 10%. Calculate the present value of the perpetuity.
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WDA - Illustration 1 A business buys a piece of equipment for $100. Capital allowances are available at 25% reducing balance. The tax rate is 30% After the 4 year project the equipment can be sold for $25.
Working Capital - Illustration 2 A business requires the following working capital investment into a four year project: Initial Investment:! ! Year 1!! Year 2!! Year 3!! ! ! ! ! ! ! 30,000 35,000 45,000 32,000
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NPV - Illustration 3 A business is evaluating a project for which the following information is relevant: I. II. Sales will be $100,000 in the rst year and are expected to increase by 5% per year. Costs will be $50,000 and are expected to increase by 7% per year.
III. Capital investment will be $200,000 and attracts tax allowable depreciation of the full value of the investment over the 5 year length of the project. IV. The tax rate is 30% and tax is payable in the following year. V. Working Capital invested will be 20% of projected sales for the following year.
VI. General ination is expected to be 3% over the course of the project and the business uses a real discount rate of 9%. Calculate the NPV for the project.
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IRR - Illustration 1 ABC has evaluated a project and come to the following conclusions. At a discount rate of 10% the NPV will be $100,000 At a discount rate of 15% the NPV will be -$75,000 What is the IRR?
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If youve successfully answered all of the above questions then youre ready to do the exam questions below: June 2009 Q2 (b) & (c) December 2010 Q1 (a) & (b) December 2007 Q2 (a) & (b) Pilot Paper Q4
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A business is considering 2 different projects. The likely prot made from each project is outlined below: Project A Projected Prot $10,000 $15,000 $20,000 $23,000 Percentage Likely-hood 10% 30% 40% 20% Project B Projected Prot $10,000 $15,000 $20,000 $23,000 Percentage Likely-hood 15% 25% 30% 30%
A business is considering a project which will cost them an initial 20,000 The sales expected for the 2 year duration are 20,000pa. The variable costs are 2,000pa Cost of capital 10% Calculate the sensitivity margin of: I. II. The initial investment. The variable costs of the projects.
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Machine cost $10,000 The Machine has a useful economic life of 5 years with no scrap value Capital allowancesavailable at 25% reducing balance Finance choices 1) 5 year loan 14.28% pre tax cost 2) 5 year Finance Lease @ $2,200 pa in advance If the machine is purchased then maintenance costs of $100 per year will be incurred. The tax rate is 30%. The leasing company will maintain the machine if it is leased. Should the company lease or buy the machine.
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Machine Cost 30,000 Running costs Year 1 10,000 Year 2 11,500 Residual Value (if sold after..) Year 1 19,000 Year 2 16,000 Cost of capital = 10% Is it better to replace the machine every year or to replace it every 2 years?
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A business has identied the following projects. They have $200,000 to invest and the projects are divisible. Project A B C D E Investment 90,000 110,000 50,000 75,000 70,000 NPV 15,000 25,000 10,000 22,000 -8,000
A business has identied the following projects. They have $200,000 to invest and the projects are non-divisible. Project A B C D Investment 90,000 110,000 50,000 75,000 NPV 15,000 25,000 10,000 22,000
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NPVDuration
Project 13005 yrs Project 22003 yrs Project 33506 yrs Calculate the EEA of each project given a cost of capital of 10%
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The Market Value of property in the Non Current Assets is $50,000 more than the book value. The Loan Notes are redeemable at a 5% premium. What is the value of a 70% holding using the net assets valuation basis?
DVM - Illustration 2
ABC pays a constant dividend of 45c. It has 3m ordinary shares. The shareholders require a return of 15%. What is the Value of the business?
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DVM - Illustration 3
A business has Share Capital made up of 50c shares of $3 million Dividend per share (just paid) 30c Dividend paid four years ago 22c Required Return = 12% Calculate the Value of the business using the dividend valuation method. P/E Ratio Method - Illustration 4
X1 $000 Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings 3000 2000 1000 300 200 500 100 120 280 100 180
X2 $000 3500 2400 1100 350 250 500 150 90 260 110 150
13
12
14
Calculate the Value of the Company for each of the 3 years using the P/E Ratio method.
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P/E Ratio Method - Illustration 5 X1 $000 Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings 3200 2000 1200 300 200 700 100 120 480 100 380 X2 $000 3800 2400 1400 350 250 800 150 90 560 110 450 X3 $000 4800 3200 1600 400 300 900 220 50 630 150 480
17 3m
15 3m
18 3m
Calculate the Earnings Per Share for each of the 3 years Calculate the Value of the Company for each of the 3 years using the EPS you calculate.
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Earnings Yield - Illustration 6 X1 $000 Revenue COS Gross Prot Admin Costs Distribution Costs PBIT Interest Tax Prot After Tax Dividends Retained Earnings 3100 2000 1100 300 200 600 100 120 380 100 280 X2 $000 3700 2400 1300 350 250 700 150 90 460 110 350 X3 $000 4600 3200 1400 400 300 700 220 50 430 150 280
0.15 4m
0.18 4m
0.17 4m
Calculate the Earnings Per Share for each of the 3 years and the share price using the earnings yield.
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ABC Company earned $100,000 in cash inows this year. They expect this to increase in each of the next 5 years by 5% and after that to increase by 2% forever. The company uses a cost of capital of 10%. Calculate the value of the company using the present value of future cash ows method.
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If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2007 Q1 (a) June 2008 Q2 (a) & (b) December 2008 Q1
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Lecture 15 WACC I
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ABC Company has just paid a dividend of 35c. The current share price is $3.25. Calculate the Cost of Equity (Ke) using DVM.
ABC Company has just paid a dividend of 35c. The dividend paid has grown by 4% per year for the past 5 years. The current share price is $3.25. Calculate the Cost of Equity (Ke) using DVM.
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Company A has a Beta of 1.2. Government bonds are currently trading at 4%. The average return than investors in the market can expect is 15%. Calculate the Cost of Equity using CAPM.
Company A has a Beta of 1.2. Company B has a Beta of 1. Government bonds are currently trading at 5%. The average return than investors in the market can expect is 12%. Calculate the Cost of Equity using CAPM for each company.
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Company A has a Beta of 1.3. Company B has a Beta of 1.2. Government bonds are currently trading at 5%. The average market risk premium is 6%. Calculate the Cost of Equity using CAPM for each company.
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Lecture 16 WACC II
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A company has issued 10% irredeemable debt. The market value of the debt is $90. The tax rate is 30% Calculate the cost of debt (Kd).
A Company has issued debt which is redeemable in 5 years time. Interest is payable at 8%. The current market value of the debt is $102. Ignore taxation. Calculate the Cost of Debt (Kd).
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A Company has issued debt which is redeemable in 5 years time. Interest is payable at 10%. The current market value of the debt is $104. Tax is payable at 30%. Calculate the Cost of Debt (Kd).
A Company has issued debt which is convertible in 5 years time. Interest is payable at 10%. The current market value of the debt is $120. On conversion, investors will have a choice of either: I. II. Cash at a 15% premium; or 18 shares per loan note.
The current share price is $6 and it is expected to grow in value by 4% per year. Tax is payable at 30%. Calculate the Cost of Debt (Kd).
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A company has issued 8% preference shares with a nominal value of $1. The market value of the shares is 80c. The tax rate is 30%. Calculate the cost of the preference shares (Kd).
A company has a bank loan of $2m at an interest rate of 10%. The tax rate is 30%. Calculate the cost of debt (Kd).
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WACC - Illustration 7
Company A is funded as follows: Item Equity Debt Capital Structure 85% 15% Cost 15% 7%
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WACC - Illustration 8
The cost to the company of each of the above items has been calculated as:
13% 8% 5%
The Loan notes are currently trading at $94. The current share price is $1.50 Calculate the Weighted Average Cost of Capital.
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WACC - Illustration 9
Ordinary Shares (50c) 12% Loan Notes 8% Preference Shares ($1) Bank Loan Details on these are as follows.
The company has an equity beta of 1.2. Government bonds are currently trading at 6% and the average market risk premium is 7%. The Loan notes are currently trading at $106 and are redeemable at par in 5 years time. The preference shares are trading at 92c. The bank loan has an interest rate of 10%. The current share price is $1.25. The tax rate is 30%. Calculate the Weighted Average Cost of Capital.
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If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2008 Q3 (a) June 2010 Q2 June 2008 Q1
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A company has total capital of $1,000 with debt making up $300 and equity making up $700 of the total. The companys cost of debt is 5% and cost of equity is 14%. I. II. Calculate the companys current WACC. Calculate the WACC if the company substitutes $200 of equity for $200 of debt causing their cost of equity to rise to 16%. III. Calculate the WACC if the company substitutes $300 of equity for $300 of debt causing their cost of equity to rise to 25%.
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Project Specic Discount Rate - Illustration 1 Company A intends to undertake a project in an unrelated industry. The following details are relevant: Item Equity Beta (e) Value of Equity Value of Debt The risk free rate is 4%. The average return on the market is 12%. Calculate a project specic discount rate. Ignore Tax Company A 1.2 1000 400 Proxy Company 1.4 800 500
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Project Specic Discount Rate - Illustration 2 Company A intends to undertake a project in an unrelated industry. The following details are relevant: Item Equity Beta (e) Value of Equity Value of Debt The risk free rate is 4%. The average return on the market is 12%. The tax rate is 30%. Calculate a project specic discount rate. Ignore Tax Company A 1.1 1200 500 Proxy Company 1.3 900 450
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If youve successfully answered all of the above questions then youre ready to do the exam questions below: December 2008 Q3 (c) June 2010 Q3 (c) (iii) December 2010 Q1 (c)
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You have an invoice to pay to a US business of $1250 and you are a UK business. The rate offered by the bank is $: 1.2500 - 1.3500 How many will it take to pay the $125?
You have issued an invoice to a US customer of $2000 and you are a UK business. The rate offered by the bank is $: 1.4500 - 1.5500 How many will you receive for the $2000?
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The current exchange rate is 2$ per . Ination in the US is 6%. Ination in the UK is 8%. What will the FX rate be in 1 years time?
The current exchange rate is 2$ per . The interest rate in the US is 3%. The interest rate in the UK is 2%. What will the FX rate be in 1 years time?
ABC Company has entered into a contract whereby they will receive $500,000 from a US customer in 3 months. ABC is a UK company. A 3 month forward rate is available at $: 1.6000 +/- 0.0500.
Calculate the amount of ABC would receive under the forward contract.
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A UK business needs to pay $350,000 to a US supplier in 3 months time. Exchange rate now: $: 1.6500 - 1.7000 Deposit rates UK 4% annual US 6% annual Borrowing rates UK 5% annual US 6.5% annual How much will the transaction cost using a money market hedge?
A UK business will receive $350,000 from a US supplier in 3 months time. Exchange rate now: $: 1.6500 - 1.7000 Deposit rates UK 4% annual US 6% annual Borrowing rates UK 5% annual US 6.5% annual How much will the business receive using a money market hedge?
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If youve successfully answered all of the above questions then youre ready to do the exam questions below: Pilot Paper Q2 (All except part (a)) December 2008 Q4 (a), (b) & (c)
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If youve successfully answered all of the above questions then youre ready to do the exam questions below: Pilot Paper Q2 (a) December 2008 Q4 (d)
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