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To provide solutions to 7x questions provided in the attached file related to Financial Management
To provide solutions to the followings 7 Questions:
Q 1) Right Issue
Briefly explain what is meant by “Right Issue” and explain its role in the Protection of Shareholders’ interests.
Briefly explain in Principle a Right Issue has NO impact on the Wealth of Shareholder, whether the Shareholder decides to invest in the issue or sell the Rights to acquire additional shares.
Carpets Direct plc wishes to increase the number of its Retail Outlets in North America. The BOD has decided to finance the expansion program by raising funds from existing Shareholders through a 1 for 4 rights issue. The most recent Income Statement of the business as follows:
Operating Profit 12.6
Profit before Taxation 6.4
Profit for the Year 4.5
A $2m ordinary dividend has been paid in respect of the year.
The Share Capital consists of 120m ordinary shares with the Par Value of $0.50 per share. These are currently being traded on the Stock Exchange at a P: E Ratio of 22 times and the BOD have decided to issue the new shares at a discount of 20% on the current Market Value.
Calculate the Theoretical Ex-Right Price – TERP of an Ordinary Share in Carpets plc.
Calculate the Price at which the Rights in Carpet Direct plc is likely to be traded.
Identify and evaluate, at the time of the Rights issue, each of the Options arising from the Rights Issue to an Investor who holds 4,000 shares before the Rights announcement.
Briefly Comment on the P: E Ratio of Carpets Direct Plc
Q2) Working Capital
Briefly describe the Working Capital & Liquidity Management and its Significance for the survival of the Companies.
State the Factors that define the nature and level of Working Capital in an Organization.
State the Procedures for efficient management of Inventory & Receivable Management.
Briefly describe the Cash Operating Cycle and state the formula.
Calculate the Working Cycle ($ & days) of Qatar plc from the following data and draw the Working Capital Cycle
31st Dec 2019
Briefly Comment (improve or worse) on the Working Capital calculated above. Provide the reason for the Statement that “Lower the Working Capital the better it is.”
Q3) Sources of Finance
State and briefly describe each type of Debt & Equity (Long Term & Short Term) Finance.
Q4) Portfolio Analysis
Briefly describe the main two Types of Risk of an Investor and state the factors generating those Risks.
Briefly explain CAPM and Coefficient of Systematic Risk – Beta. Also, state the 3 types of Beta with one-liner definition.
Briefly explain how an Efficient Portfolio reduces the Risk of an Investor.
Security A has an expected Return of 20% and a standard deviation of 25% whereas Security B has an expected Return of 30% and a standard deviation of 35%.The Covariance of the Returns on these two securities is 230RequirementDetermine the expected Return & Risk of a Portfolio made up of 30% of A and 70% of B.
If the Average Variance of securities is 280 and the Average Co-Variance is 150.
Determine the expected Risk of an Equally Weighted Portfolio made up of 50 Securities.
Q5) Valuation of Securities
Briefly explain the different basis of Valuation of Shares.
Easy plc has just paid the dividend of 50p. The expected Return is 20%, and 60% of the Profits are divided. Average Market Returns are 12% and the Return on Govt. Bond is 4%, and Beta of the Security is 1.2
Determine the Market Price of the Share.
Q 6 Cost of Capital
Berap plc is financed by 7m $1 Ordinary Shares and $8m 8% Redeemable Debentures. Market Values are $1.20 Ex-Dividend and 90% Ex Interest.
Apart from the above Company has a Bank Loan of $2m at 8% and $1 Preference Shares of $1m with 12 p per share agreed on the dividend.
Company also has 3m Irredeemable Debentures at 12%.
An Ordinary Dividend of 10p has just been paid, and future ordinary dividends expect to grow by 5%. Debentures are Redeemable in 5 Years’ time.
Calculate the Capital Structure of the Company
Calculate the WACC of the Company
Q 7 Investment Appraisal
Robo Clean Co is a recently established innovation company. It currently has one product on the market, the Robovac’, a robotic floor cleaner. This has been extremely successful. The company is currently developing a new robotic cleaner called ‘Rob mum’ that vacuums, dust and presses.
Todate$120,000has been spent on developing the product. The company has also in cured $250,000 of market research costs, although the invoice for these costs has only just been received and will be paid in January.
Since the set-up costs are substantial, a final decision now needs to be made a stow hether it is viable to manufacture and sell ‘Robomum’. The following revenues and costs have beenestimated:
A new factory, to be used solely for the production of ‘Robomum’, will need to be built. This will take nearly a year to build and is expected to cost $11•75 million in total, payable in two instalments. The first instalment of $6m will be paid at the start of the building work and this second instalment for the remaining balance will be paid when the building work has been completed at the end of the year.
Robo Clean Co will immediately enter into a one-year contract with a project management company, who will oversee the building of the factory. The total cost of this during the year will be $250,000. Two production lines will need to be installed in the factory at a further cost of $1,500,000payableattheend of the build in one-year time.
The machinery for the production of ‘Robomum’ also needs to be built-to-order and is expected to cost $2•5m, payable in one year’s time. Its terminal value is nil. Depreciation will be charged as soon as production commences (as soon as the build finishes in one year’s time) at 10% per annum on a straight-line basis. Maintenance costs for the machinery are estimated at $250,000 per annum.
Production and Sales will commence in the year following the build. Sales quantities and prices for ‘Ro Robomum’ is expected to be as follows:It is anticipated that by the beginning of year10, a new robotic helper will have replaced ‘Robomum’. Hence there will be no further sales.Years 123 & 45 to 9 Sales volume (’000 units) 5 10(each year)30(each year)50Sales price ($)1,000800700500It is anticipated that by the beginning of year10, a new robotic helper will have replaced ‘Robomum’. Hence there will be no further sales.
Material costs for ‘Robomum’ are estimated at $125 per unit.
Labour costs are estimated at $100 per unit.
Fixed production overhead son the new factory are estimated at $240,000perannum.Variable production overheads are expected to be $50 per unit.
Head office costs of $4•5m per annum will be allocated to ‘Robomum’ when production commences. Of these costs, only $3•7m is incremental.
The introduction of ‘Robomum’ is expected to affect sales of ‘Robovac’ adversely. It is thought that for every two units of ‘Robomum’ sold, one unit of ‘Robovac’ will be lost. ‘Robovac’iscurrentlysoldfor$150 per unit and generates a net cash flow of $50 per unit.
The company’s cost of capital is 5%.
Assume that all cash flow occurs at the end of the year unless stated otherwise.
Using the discount tables, calculate the net present value (NPV) of the project at the company’s cost of capital. Conclude as to whether Robo Clean Co should proceed with the Project.
Explain the main principles to differentiate between relevant and irrelevant costs for investment appraisal. Wherever possible, use the costs of ‘Robomum’ to illustrate your answer.
Calculate the Payback (Simple & Discounted) of the Project.
Calculate the IRR of the Project.
Calculate the Profitability Index – PI of the following Projects and state which Project to be undertaken and why.
PV of Inflows
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