题目内容
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:
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.
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.
Required:
(a) Calculate the value of GWW Co using the following methods:
(i) market capitalisation (equity market value);
(ii) net asset value (liquidation basis);
(iii) price/earnings ratio method using the business sector average price/earnings ratio;
(iv) dividend growth model using:
(1) the average historic dividend growth rate;
The total marks will be split equally between each part. (10 marks)
(b) Discuss the relative merits of the valuation methods in part (a) above in determining a purchase price for GWW Co.
(c) Calculate the following values for GWW Co:
(i) the before-tax market value of the bonds of GWW Co;
(ii) debt/equity ratio (book value basis);
(iii) debt/equity ratio (market value basis).
Discuss the usefulness of the debt/equity ratio in assessing the financial risk of GWW Co.
The total marks will be split equally between each part. (7 marks)
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The statement of financial position of BKB Co provides the following information:
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.
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.
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.
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.
Required:
(a) Calculate the market value after-tax weighted average cost of capital of BKB Co, explaining clearly any assumptions you make. (12 marks)
(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)
(c) Comment on the interest rate risk faced by BKB Co and discuss briefly how this risk can be managed. (5 marks)
(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)
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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.
Extracts from the company’s most recent statement of financial position relating to working capital are as follows:
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.
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.
KXP Co has an overdraft facility charging interest of 6% per year.
Required:
(a) Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on your findings. (6 marks)
(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)
(c) Identify and discuss the factors to be considered in determining the optimum level of cash to be held by a company. (5 marks)
(d) Discuss the factors to be considered in formulating a trade receivables management policy. (8 marks)
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