Questions and Answers of Sport Funding And Finance

28 Tillers Ltd is evaluating two mutually exclusive projects, X and Y. A table has been prepared to forecast net cash flow under different economic conditions:
27 Refer to the Technability Ltd example in this chapter. The firm’s financial controller is concerned that future inflation may be higher than expected and that the NPV of the proposed equipment
26 Wirth International Hotels Ltd is reviewing several investment proposals for the next year. To undertake all eight projects would cost $1 550 000, but due to funding restrictions the firm only has
25 Fishing Supplies Ltd is evaluating two mutually exclusive investment opportunities. The incremental cash flows for each investment are as follows:
24 Investco Ltd is considering three alternative investment opportunities. The incremental cash flows attributable to each investment are:
23 Green Forestry Products Ltd is considering two alternative investments. One involves upgrading major equipment at a cost of $50 000, while the alternative is to replace the equipment with a newer
22 Successful Chocolates Ltd is evaluating the purchase of new processing equipment at a cost of $90 000. The acquisition is expected to generate net cash flows as follows:Calculate the net present
21 Calculate the payback period for each of the following investments, and rank the investments in order of acceptability:
20 Action Rollerblades is considering a geographical expansion that is expected to affect profits as shown below:
19 In practice, sensitivity analysis is more commonly used than risk-adjusted required returns to deal with risk in capital budgeting. Give a possible reason for this preference.
18 Three divisions of a diversified international company have estimated their weighted average cost of capital as follows:
17 What would be the effect on the NPV of a project if inflation is higher than expected?
16 How would the cash flows and discount rate for a proposed investment opportunity be affected by a forecast of high inflation?
15 Why would an investment in marketable securities be likely to return less than the firm’s weighted average cost of capital?
14 Why is it that in a circumstance of capital rationing, projects with a short payback period may be preferred?
13 Describe the circumstances in which the use of the IRR technique can result in sub-optimal decisions being taken.
12 Some government departments and state-owned enterprises(SOEs) in New Zealand must pay to the Crown an annual capital or financing charge based on the value of their assets.The purpose is to ensure
11 Compare the advantages and disadvantages of the NPV and IRR techniques. Which is theoretically superior? Explain.
10 Which techniques of investment evaluation are consistent with the goal of owner wealth maximisation? Explain.
9 Describe two approaches for considering risk in capital budgeting.
8 What are mutually exclusive projects?
7 What is the IRR, and what is its decision criterion?
6 What is the NPV, and what is its decision criterion?
5 Why are cash flows preferred over accounting profits to measure the benefits and costs of a long-term investment project?
4 What are the advantages and disadvantages of the payback period?
3 What is the payback period, and what is its decision criterion?
2 What are the advantages and disadvantages of the AROI technique?
1 What is the accounting return on investment(AROI), and what is its decision criterion?
■describe sensitivity analysis and risk-adjusted required returns, and how they apply to capital budgeting problems.
■discuss the treatment of inflation in the context of capital budgeting
■explain how to apply the NPV technique when capital rationing is present
■explain the four techniques of investment evaluation –accounting return on investment (AROI), payback period, net present value (NPV), and internal rate of return (IRR) –assess their
12 Secura-T Systems Ltd is evaluating the possibility of manufacturing a new security alarm system. Company policy dictates that a maximum cut-off point of six years is used for the evaluation of all
11 Miller International Ltd is considering the purchase of new equipment at a cost of $480 000 plus installation of $20 000.There will be no increase in revenue if the equipment is purchased, but
10 Calculate the terminal value in each of the following circumstances when, at the end of the useful life of the asset, the adjusted tax value is $46 000 and the tax rate is 30%. The original
8 Exotic Foods Café is considering the purchase of new foodprocessing equipment. The initial outlay will cost $60 000 and installation costs will total $6 000. Sales are expected to increase by $20
7 Conrad Entertainment Ltd has purchased new gaming equipment at a cost of $90 000. Installation costs will be $10 000. Calculate the allowable depreciation expense for tax purposes for each of the
6 For the financial evaluation of long-term investments, it is necessary to calculate the gain or loss upon the disposal of assets, and yet it is not correct to include the gain or loss in the net
5 Why should the financial evaluation of long-term investments consider only incremental benefits and costs?
4 What is depreciation expense? Why is it deducted and then added back to arrive at operating cash flow? Does this not result in a nil effect?
3 Is interest expense included in operating expenses for the purpose of calculating operating cash flow? Explain.
2 Describe the steps of determining, evaluating and implementing long-term investment opportunities.
1 Describe how stakeholders’ interests may be considered in long-term investment decision-making.
■determine the terminal value for an investment proposal.
■calculate the tax effects arising from the sale of a long-term asset
■calculate the annual operating cash flows for an investment proposal
■explain the concept of depreciation, and calculate the annual depreciation allowed for taxation purposes on an asset using the diminishing value method
■calculate the investment outlay for an investment proposal
■describe the steps of determining, evaluating and implementing long-term investment projects
49 You are working as an investment analyst and have been asked to estimate the cost of ordinary share equity for several companies. The current risk-free rate is 4.5% and the equity market risk
48 Several years ago Trentham Ltd issued 10% preference shares at their face value of $100 per share.a Calculate the cost of preference shares, assuming that they are currently selling for $120 per
47 Big Oak Furniture Ltd is considering two alternative capital structures:The firm’s tax rate is 30%.a Calculate Big Oak’s profit after taxes and earnings per share(EPS) at three alternative
46 Fast Paced Entertainment Ltd is evaluating the following(independent) investment opportunities:Fast Paced has determined its optimal capital structure and finance costs to be:
45 Taylor Ltd has determined its optimal capital structure and finance costs to be as follows:Calculate Taylor Ltd’s weighted average cost of capital.
44 Kiwi Kids Shops Ltd intends to finance its future investments with 30% debt and 70% equity. The pre-tax interest cost of debt is 8%, while the after-tax cost of new ordinary shares is 18%.
43 Best Buy Supermarkets Ltd has total assets of $800 000. The current capital structure comprises 50% debt and 50% equity.The annual interest cost of debt is 12%, and there are 500 000 shares on
42 New-U Cosmetics Ltd is attempting to balance its policy variables with respect to its investment, financing and dividend requirements. The firm wishes to undertake new investments costing $100 000
41 Fiona Swimwear Manufacturing Ltd’s total assets for each month next year are forecast as follows:
40 James Fishing Supplies currently has the following assets, liabilities and owners’ equity
39 Teddy Toys Ltd is examining its mix of short-term and longterm finance. The relative costs of each are as follows:a Calculate the total annual financing cost for the firm, given the current
38 What is the weighted average cost of capital to a firm, and how is it relevant in the evaluation of potential investment projects?
37 Explain why the use of retained earnings involves a cost to a firm.
36 What costs does a firm incur with respect to financing with ordinary shares?
35 Name the three components of the after-tax cost of debt. For each component, describe whether the effect is to increase or decrease the cost to the firm.
34 Belinda Fine Foods Ltd is a successful medium-sized firm with total assets of $3 200 000. Due to the conservative nature of the managing director, who owns 51% of the issued capital, the firm is
33 Wendell wants to purchase his first home, but has been unable to save enough money for a deposit. The house will cost $220 000, but the maximum mortgage loan Wendell can obtain is for $176 000.
32 Ruth purchased a corner dairy for $200 000. The vendor took$120 000 immediately as part-payment, a sum which Ruth had obtained as a long-term loan from her aunt. The balance of the purchase price
31 What are the risks and returns attributable to debt and equity finance from the point of view of the firm?
30 It has been said that ‘debt is a double-edged sword’. What is meant by this expression?
29 In what way are investment, dividend and financing strategies interdependent?
28 Differentiate between internal and external sources of funds.
27 Twin Hills Ski Shop expects monthly inventory levels over the next year to range from $100 000 to $700 000. Would you recommend the use of mostly short-term or long-term funds to finance the
26 Wally has financed the purchase of a small-town hotel with short-term debt. Do you foresee any potential problems with this?
25 How does a strategy of using a high proportion of short-term finance affect the profits and risks of a firm?
24 Define the terms Euromarket and eurocurrency loans.
23 Why is it that many large, successful companies choose to raise a portion of their debt and equity funds in foreign markets?
22 What is the difference between a foreign bond and a eurobond?
21 Why are convertible securities often considered to be deferred equity finance? What circumstances would lead a company to prefer to issue convertible securities that convert to ordinary shares in
20 Describe three different ways for a public company to raise external equity funds using ordinary shares.
19 Distinguish between a private placement and a public offering.
18 What is an investment bank?
17 What is the advantage of a syndicated loan from the point of view of:a borrower?b the lenders?
16 Distinguish between bank bills and commercial bills.
15 List the major sources of finance available during the maturity stage of a firm’s life cycle. Identify each source as debt, equity or either debt or equity.
14 Describe the alternative debt instruments available to finance the accounts receivable of a firm in the growth stage of its life cycle.
13 What financial problems could cause the failure of a young, profitable, growing business?
12 Define the terms line of credit, revolving credit, pledge and factoring.
11 List the major sources of finance available during the growth stage of a firm’s life cycle. Identify each source as debt, equity, or either debt or equity.
10 Explain the major features that distinguish a financial lease from an operating lease.
9 types of debt instrument would be suitable to finance the purchase of major equipment by a firm in the start-up stage of its life cycle?
8 Discuss the major financing problems of a firm during the start-up stage of its life cycle.
7 List and define the various debt instruments available from banks and financial institutions in the start-up stage of a firm’s life cycle.
6 What are venture capital funds, and how do venture capital organisations fill a void in equity funding for businesses?
5 List the major sources of finance available during the start-up stage of a firm’s life cycle. Identify each source as debt, equity or either debt or equity.
4 Describe the changes in sales and operating cash flow over a firm’s life cycle.
3 List the major features that distinguish debt from equity.
2 Why is it that the cost of debt to a firm is less than the cost of equity?
1 Why is it that debt is considered by lenders to be of lower risk than equity?
What proportions of debt and equity will maximise the value of the firm?
To what extent should internal versus external sources of funds be used?

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