A shareholder of QSX Co is concerned about the recent performance of the company and has collected the following fi nancial information.<br>One of the items discussed at a recent board meeting of QSX Co was the dividend payment for 2010. The fi nance director proposed that, in order to conserve cash within the company, no dividend would be paid in 2010, 2011 and 2012. It was expected that improved economic conditions at the end of this three-year period would make it possible to pay a dividend of 70c per share in 2013. The fi nance director expects that an annual dividend increase of 3% per year in subsequent years could be maintained.<br>The current cost of equity of QSX Co is 10% per year.<br>Assume that dividends are paid at the end of each year.<br>Required:<br>(a) Calculate the dividend yield, capital gain and total shareholder return for 2008 and 2009, and briefl y discuss your fi ndings with respect to:<br>(i) the returns predicted by the capital asset pricing model (CAPM);<br>(ii) the other fi nancial information provided. (10 marks)<br>(b) Calculate and comment on the share price of QSX Co using the dividend growth model in the following circumstances:<br>(i) based on the historical information provided;<br>(ii) if the proposed change in dividend policy is implemented. (7 marks)<br>(c) Discuss the relationship between investment decisions, dividend decisions and fi nancing decisions in the context of fi nancial management, illustrating your discussion with examples where appropriate. (8 marks)

YGV Co has been advised by its bank that the current overdraft limit of $4？5 million will be reduced to $500,000 in two months’ time. The fi nance director of YGV Co has been unable to fi nd another bank willing to offer alternative overdraft facilities and is planning to issue bonds on the stock market in order to fi nance the reduction of the overdraft. The bonds would be issued at their par value of $100 per bond and would pay interest of 9% per year, payable at the end of each year. The bonds would be redeemable at a 10% premium to their par value after 10 years. The fi nance director hopes to raise $4 million from the bond issue.<br>The ordinary shares of YGV Co have a par value of $1？00 per share and a current market value of $4？10 per share. The cost of equity of YGV Co is 12% per year and the current interest rate on the overdraft is 5% per year. Taxation is at an annual rate of 30%.<br>Other fi nancial information:<br>Average gearing of sector (debt/equity, market value basis): 10%<br>Average interest coverage ratio of sector: 8 times<br>Required:<br>(a) Calculate the after–tax cost of debt of the 9% bonds. (4 marks)<br>(b) Calculate and comment on the effect of the bond issue on the weighted average cost of capital of YGV Co, clearly stating any assumptions that you make. (5 marks)<br>(c) Calculate the effect of using the bond issue to fi nance the reduction in the overdraft on: (i) the interest coverage ratio; (ii) gearing. (4 marks)<br>(d) Evaluate the proposal to use the bond issue to fi nance the reduction in the overdraft and discuss alternative sources of fi nance that could be considered by YGV Co, given its current fi nancial position. (12 marks)

ZSE Co is concerned about exceeding its overdraft limit of $2 million in the next two periods. It has been experiencing considerable volatility in cash fl ows in recent periods because of trading diffi culties experienced by its customers, who have often settled their accounts after the agreed credit period of 60 days. ZSE has also experienced an increase in bad debts due to a small number of customers going into liquidation.<br>The company has prepared the following forecasts of net cash fl ows for the next two periods, together with their associated probabilities, in an attempt to anticipate liquidity and fi nancing problems. These probabilities have been produced by a computer model which simulates a number of possible future economic scenarios. The computer model has been built with the aid of a fi rm of fi nancial consultants.<br>Required:<br>(a) Calculate the following values:<br>(i) the expected value of the period 1 closing balance;<br>(ii) the expected value of the period 2 closing balance;<br>(iii) the probability of a negative cash balance at the end of period 2;<br>(iv) the probability of exceeding the overdraft limit at the end of period 2.<br>Discuss whether the above analysis can assist the company in managing its cash fl ows. (13 marks)<br>(b) Identify and discuss the factors to be considered in formulating a trade receivables management policy for ZSE Co. (8 marks)<br>(c) Discuss whether profi tability or liquidity is the primary objective of working capital management. (4 marks)

The following financial information relates to HGR Co:<br>Statement of financial position at the current date (extracts)<br>The finance director has completed a review of accounts receivable management and has proposed staff training and operating procedure improvements, which he believes will reduce accounts receivable days to the average sector value of 53 days. This reduction would take six months to achieve from the current date, with an equal reduction in each month. He has also proposed changes to inventory management methods, which he hopes will reduce inventory days by two days per month each month over a three-month period from the current date. He does not expect any change in the current level of accounts payable.<br>HGR Co has an overdraft limit of $4,000,000. Overdraft interest is payable at an annual rate of 6·17% per year, with payments being made each month based on the opening balance at the start of that month. Credit sales for the year to the current date were $49,275,000 and cost of sales was $37,230,000. These levels of credit sales and cost of sales are expected to be maintained in the coming year. Assume that there are 365 working days in each year.<br>Required:<br>(a) Discuss the working capital financing strategy of HGR Co. (7 marks)<br>(b) For HGR Co, calculate:<br>(i) the bank balance in three months’ time if no action is taken; and<br>(ii) the bank balance in three months’ time if the finance director’s proposals are implemented.<br>Comment on the forecast cash flow position of HGR Co and recommend a suitable course of action.<br>(10 marks)<br>(c) Discuss how risks arising from granting credit to foreign customers can be managed and reduced.<br>(8 marks)

NGN has a cost of equity of 12% per year and has maintained a dividend payout ratio of 45% for several years. The current earnings per share of the company is 80c per share and its earnings have grown at an average rate of 4·5% per year in recent years.<br>The ex div share price of KFP Co is $4·20 per share and it has an equity beta of 1·2. The 7% bonds of the company are trading on an ex interest basis at $94·74 per $100 bond. The price/earnings ratio of KFP Co is eight times.<br>The directors of KFP Co believe a cash offer for the shares of NGN would have the best chance of success. It has been suggested that a cash offer could be financed by debt.<br>Required:<br>(a) Calculate the weighted average cost of capital of KFP Co on a market value weighted basis. (10 marks)<br>(b) Calculate the total value of the target company, NGN, using the following valuation methods:<br>(i) Price/earnings ratio method, using the price/earnings ratio of KFP Co; and<br>(ii) Dividend growth model. (6 marks)<br>(c) Discuss the relationship between capital structure and weighted average cost of capital, and comment on<br>the suggestion that debt could be used to finance a cash offer for NGN. (9 marks)

JJG Co is planning to raise $15 million of new finance for a major expansion of existing business and is considering a rights issue, a placing or an issue of bonds. The corporate objectives of JJG Co, as stated in its Annual Report, are to maximise the wealth of its shareholders and to achieve continuous growth in earnings per share. Recent financial information on JJG Co is as follows:<br>Required:<br>(a) Evaluate the financial performance of JJG Co, and analyse and discuss the extent to which the company has achieved its stated corporate objectives of:<br>(i) maximising the wealth of its shareholders;<br>(ii) achieving continuous growth in earnings per share.<br>Note: up to 7 marks are available for financial analysis.(12 marks)<br>(b) If the new finance is raised via a rights issue at $7·50 per share and the major expansion of business has<br>not yet begun, calculate and comment on the effect of the rights issue on:<br>(i) the share price of JJG Co;<br>(ii) the earnings per share of the company; and<br>(iii) the debt/equity ratio. (6 marks)<br>(c) Analyse and discuss the relative merits of a rights issue, a placing and an issue of bonds as ways of raising the finance for the expansion. (7 marks)

Initial investment $2 million<br>Selling price (current price terms) $20 per unit<br>Expected selling price inflation 3% per year<br>Variable operating costs (current price terms) $8 per unit<br>Fixed operating costs (current price terms) $170,000 per year<br>Expected operating cost inflation 4% per year<br>The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of Product W33.<br>It is expected that all units of Product W33 produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of Product W33 is planned to end. For investment appraisal purposes, PV Co uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation.<br>Required:<br>(a) Identify and explain the key stages in the capital investment decision-making process, and the role of<br>investment appraisal in this process. (7 marks)<br>(b) Calculate the following values for the investment proposal:<br>(i) net present value;<br>(ii) internal rate of return;<br>(iii) return on capital employed (accounting rate of return) based on average investment; and<br>(iv) discounted payback period. (13 marks)<br>(c) Discuss your findings in each section of (b) above and advise whether the investment proposal is financially acceptable. (5 marks)

KQK Co wants to raise $20 million in order to expand its business and wishes to evaluate one possibility, which is an issue of 8% loan notes. Extracts from the financial statements of KQK Co are as follows.<br>It is expected that investing $20 million in the business will increase income by 5% over the first year. Approximately 40% of cost of sales and other expenses are fixed, the remainder of these costs are variable. Fixed costs will not be affected by the business expansion, while variable costs will increase in line with income.<br>KQK Co pays corporation tax at a rate of 30%. The company has a policy of paying out 40% of profit after tax as dividends to shareholders.<br>Current liabilities are expected to increase by 3% by the end of the first year following the business expansion.<br>Average values of other companies similar to KQK Co:<br>Required:<br>(a) Assess the impact of financing the business expansion by the loan note issue on financial position, financial risk and shareholder wealth after one year, using appropriate measures. (10 marks)<br>(b) Discuss the circumstances under which the current weighted average cost of capital of a company could be used in investment appraisal and indicate briefly how its limitations as a discount rate could be overcome. (5 marks)

Crag Co has sales of $200m per year and the gross profit margin is 40%. Finished goods inventory days vary throughout the year within the following range:<br>All purchases and sales are made on a cash basis and no inventory of raw materials or work in progress is carried. Crag Co intends to finance permanent current assets with equity and fluctuating current assets with its overdraft.<br>In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed from the overdraft？

A. $10m
B. $17m
C. $30m
D. $40m

Pop Co is switching from using mainly long-term fixed rate finance to fund its working capital to using mainly short-term variable rate finance.<br>Which of the following statements about the change in Pop Co’s working capital financing policy is true？

A. Finance costs will increase
B. Re-financing risk will increase
C. Interest rate risk will decrease
D. Overcapitalisation risk will decrease