An investment project has a cost of $12,000, payable at the start of the first year of operation. The possible future cash flows arising from the investment project have the following present values and associated probabilities:<br>What is the expected value of the net present value of the investment project？

A. $11,850
B. $28,700
C. $11,100
D. $76,300

A company whose home currency is the dollar ($) expects to receive 500,000 pesos in six months’ time from a customer in a foreign country. The following interest rates and exchange rates are available to the company:<br>Working to the nearest $100, what is the six-month dollar value of the expected receipt using a money-market hedge？

A. $32,500
B. $33,700
C. $31,800
D. $31,900

TKQ Co has just paid a dividend of 21 cents per share and its share price one year ago was

A. $3·50
B. $3·71
C. $3·31
D. $3·35

The following financial information relates to MFZ Co, a listed company:<br>MFZ Co has 12 million ordinary shares in issue and has not issued any new shares in the period under review. The company is financed entirely by equity, and is considering investing $9·2 million of new finance in order to expand existing business operations. This new finance could be either long-term debt finance or new equity via a rights issue. The rights issue price would be at a 20% discount to the current share price. Issue costs of $200,000 would have to be met from the cash raised, whether the new finance was equity or debt.<br>The annual report of MFZ Co states that the company has three financial objectives:<br>Objective 1: To achieve growth in profit before interest and tax of 4% per year<br>Objective 2: To achieve growth in earnings per share of 3·5% per year<br>Objective 3: To achieve total shareholder return of 5% per year<br>MFZ Co has a cost of equity of 12% per year.<br>Required:<br>(a) Analyse and discuss the extent to which MFZ Co has achieved each of its stated objectives. (7 marks)<br>(b) Calculate the total equity market value of MFZ Co for 2014 using the dividend growth model and briefly discuss why the dividend growth model value may differ from the current equity market value. (5 marks)<br>(c) Calculate the theoretical ex rights price per share for the proposed rights issue. (5 marks)<br>(d) Discuss the sources and characteristics of long-term debt finance which may be available to MFZ Co. (8 marks)

Fence Co plans to invest in a project which is different to its existing business operations and has identified a company in the same business area as the project, Hex Co. The equity beta of Hex Co is 1·2 and the company has an equity market value of $54 million. The market value of the debt of Hex Co is $12 million.<br>The risk-free rate of return is 4% per year and the average return on the stock market is 11% per year. Both companies pay corporation tax at a rate of 20% per year.<br>Required:<br>(a) Calculate the current weighted average cost of capital of Fence Co. (7 marks)<br>(b) Calculate a cost of equity which could be used in appraising the new project. (4 marks)<br>(c) Explain the difference between systematic and unsystematic risk in relation to portfolio theory and the capital asset pricing model. (6 marks)<br>(d) Discuss the differences between weak form, semi-strong form. and strong form. capital market efficiency, and discuss the significance of the efficient market hypothesis (EMH) for the financial manager. (8 marks)

The current assets and current liabilities of CSZ Co at the end of March 2014 are as follows:<br>For the year to end of March 2014, CSZ Co had domestic and foreign sales of $40 million, all on credit, while cost of sales was $26 million. Trade payables related to both domestic and foreign suppliers.<br>For the year to end of March 2015, CSZ Co has forecast that credit sales will remain at $40 million while cost of sales will fall to 60% of sales. The company expects current assets to consist of inventory and trade receivables, and current liabilities to consist of trade payables and the company’s overdraft.<br>CSZ Co also plans to achieve the following target working capital ratio values for the year to the end of March 2015:<br>Required:<br>(a) Calculate the working capital cycle (cash collection cycle) of CSZ Co at the end of March 2014 and discuss whether a working capital cycle should be positive or negative. (6 marks)<br>(b) Calculate the target quick ratio (acid test ratio) and the target ratio of sales to net working capital of CSZ Co at the end of March 2015. (5 marks)<br>(c) Analyse and compare the current asset and current liability positions for March 2014 and March 2015, and discuss how the working capital financing policy of CSZ Co would have changed. (8 marks)<br>(d) Briefly discuss THREE internal methods which could be used by CSZ Co to manage foreign currency transaction risk arising from its continuing business activities. (6 marks)

All five projects have a project life of four years. Projects A, B, C and D are divisible, and Projects B and D are mutually exclusive. All net present values are in nominal, after-tax terms.<br>Project E<br>This is a strategically important project which the Board of OAP Co have decided must be undertaken in order for the company to remain competitive, regardless of its financial acceptability. Information relating to the future cash flows of this project is as follows:<br>These forecasts are before taking account of selling price inflation of 5·0% per year, variable cost inflation of 6·0% per year and fixed cost inflation of 3·5% per year. The fixed costs are incremental fixed costs which are associated with Project E. At the end of four years, machinery from the project will be sold for scrap with a value of $400,000. Tax allowable depreciation on the initial investment cost of Project E is available on a 25% reducing balance basis and OAP Co pays corporation tax of 28% per year, one year in arrears. A balancing charge or allowance is available at the end of the fourth year of operation.<br>OAP Co has a nominal after-tax cost of capital of 13% per year.<br>Required:<br>(a) Calculate the nominal after-tax net present value of Project E and comment on the financial acceptability of this project. (14 marks)<br>(b) Calculate the maximum net present value which can be obtained from investing the fund of $10 million, assuming here that the nominal after-tax NPV of Project E is zero. (5 marks)<br>(c) Discuss the reasons why the Board of OAP Co may have decided to limit investment funds for the next year. (6 marks)

GWW Co is a listed company which is seen as a potential target for acquisition by financial analysts. The value of the company has therefore been a matter of public debate in recent weeks and the following financial information is available:<br>The shares of GWW Co have a nominal (par) value of 50c per share and a market value of $4·00 per share. The cost of equity of the company is 9% per year. The business sector of GWW Co has an average price/earnings ratio of 17 times. The 8% bonds are redeemable at nominal (par) value of $100 per bond in seven years’ time and the before-tax cost of debt of GWW Co is 6% per year.<br>The expected net realisable values of the non-current assets and the inventory are $86·0m and $4·2m, respectively. In the event of liquidation, only 80% of the trade receivables are expected to be collectible.<br>Required:<br>(a) Calculate the value of GWW Co using the following methods:<br>(i) market capitalisation (equity market value);<br>(ii) net asset value (liquidation basis);<br>(iii) price/earnings ratio method using the business sector average price/earnings ratio;<br>(iv) dividend growth model using:<br>(1) the average historic dividend growth rate;<br>The total marks will be split equally between each part. (10 marks)<br>(b) Discuss the relative merits of the valuation methods in part (a) above in determining a purchase price for GWW Co.<br>(c) Calculate the following values for GWW Co:<br>(i) the before-tax market value of the bonds of GWW Co;<br>(ii) debt/equity ratio (book value basis);<br>(iii) debt/equity ratio (market value basis).<br>Discuss the usefulness of the debt/equity ratio in assessing the financial risk of GWW Co.<br>The total marks will be split equally between each part. (7 marks)

The statement of financial position of BKB Co provides the following information:<br>BKB Co has an equity beta of 1·2 and the ex-dividend market value of the company’s equity is $125 million. The ex-interest market value of the convertible bonds is $21 million and the ex-dividend market value of the preference shares is $6·25 million.<br>The convertible bonds of BKB Co have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years’ time. The current ordinary share price of BKB Co is expected to increase by 4% per year for the foreseeable future.<br>The overdraft has a variable interest rate which is currently 6% per year and BKB Co expects this to increase in the near future. The overdraft has not changed in size over the last financial year, although one year ago the overdraft interest rate was 4% per year. The company’s bank will not allow the overdraft to increase from its current level.<br>The equity risk premium is 5% per year and the risk-free rate of return is 4% per year. BKB Co pays profit tax at an annual rate of 30% per year.<br>Required:<br>(a) Calculate the market value after-tax weighted average cost of capital of BKB Co, explaining clearly any assumptions you make. (12 marks)<br>(b) Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions. (4 marks)<br>(c) Comment on the interest rate risk faced by BKB Co and discuss briefly how this risk can be managed. (5 marks)<br>(d) Discuss the attractions to a company of convertible debt compared to a bank loan of a similar maturity as a source of finance. (4 marks)

KXP Co is an e-business which trades solely over the internet. In the last year the company had sales of $15 million. All sales were on 30 days’ credit to commercial customers.<br>Extracts from the company’s most recent statement of financial position relating to working capital are as follows:<br>In order to encourage customers to pay on time, KXP Co proposes introducing an early settlement discount of 1% for payment within 30 days, while increasing its normal credit period to 45 days. It is expected that, on average, 50% of customers will take the discount and pay within 30 days, 30% of customers will pay after 45 days, and 20% of customers will not change their current paying behaviour.<br>KXP Co currently orders 15,000 units per month of Product Z, demand for which is constant. There is only one supplier of Product Z and the cost of Product Z purchases over the last year was $540,000. The supplier has offered a 2% discount for orders of Product Z of 30,000 units or more. Each order costs KXP Co $150 to place and the holding cost is 24 cents per unit per year.<br>KXP Co has an overdraft facility charging interest of 6% per year.<br>Required:<br>(a) Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on your findings. (6 marks)<br>(b) Calculate whether the bulk purchase discount offered by the supplier is financially acceptable and comment on the assumptions made by your calculation. (6 marks)<br>(c) Identify and discuss the factors to be considered in determining the optimum level of cash to be held by a company. (5 marks)<br>(d) Discuss the factors to be considered in formulating a trade receivables management policy. (8 marks)