2 MBA5903 OCTOBER NOVEMBER 2019 as 128(1-3) Question 1 [10 Marks] Two projects have the following expected net present values and standard deviations of net present values Project Expected Net Present Value Standard Deviation A R50,000 R20.000 B R10,000 R7,000 Required: 11 Using the standard deviation criterion, which project is riskier? Using the coefficient of variation criterion, which project is riskier? 13 Which criterion do you this is appropriate to use in this case? Why? 12 (2) (5) (3) Question 2 [8 Marks] Nashua is considering expanding into the growing laser copier business Nashua estimates that this expansion will cost R1 8 million and will generate a 20-year stream of expected net cash flows amounting to R400,000 per year The company's weighted cost of capital is 15 percent 22 Required 21 Calculate the net present value of the laser copier project using the company's weighted cost of capital and the expected cash flows from the project (3) Using the risk-adjusted discount rate approach, management has decided that this project has substantially more risk than average and has decided that it requires a 24 percent expected rate of return on projects like this Recalculate the risk-adjusted net present value of this project (3) 23 Should Nashua accept this project? (2) Question 3 (10 Marks] Coller Tools has recently declared a dividend, D., of R1 per share Analysts and investors expect Coller to increase its dividends at a 10 percent rate for each of the next 2 years The annual dividend growth rate is expected to decline to 8 percent for year 3 and 4 and then to settle down to 4 percent per year forever The required return for investing in Coller Tools is 16% Required. 31 Determine the fair price for Coller Tools [TURN OVER] 3 MBA5903 OCTOBER NOVEMBER 2019 Question 4 [12 Marks] Aspen Pharmaceutical company's beta is 15 The current risk-free rate is 45 percent and the market risk premium is 9 percent Aspen currently (time 0) pays a dividend of R2 per share This dividend is expected to grow at a rate of 20 percent for the next 3 years The current share price is R30, and the consensus of security analysts is that this price will increase by 50 percent by the end of year 2 Required. 41 Under these circumstances, would you purchase this share? 42 Based on your answer in 4 1 above, would you buy Aspen's share? Explain (10) (2) Question 5 [19 Marks] Note the following information on two mutually exclusive projects under consideration by Woollies Food Market company Annual Cash Flows Year A 0 -R30 000 -R60,000 1 R10,000 R20,000 2 R10,000 R20,000 3 R10,000 4 R10,000 R20,000 R20,000 R20,000 5 R10,000 Woollies requires a 14 percent rate of return on projects of this nature (4) Required. 51 Calculate the NPV of both projects 52 Calculate the profitability index of both projects 53 Calculate the payback on both projects 54 Calculate the discounted payback on both projects 55 Which of the two projects, if either, should Woollies accept? Why? (4) (3) [8 Marks] Question 6 An investment offers the following year-end cash flows End of Year Cash Flow 1 R20,000 2 R30,000 3 R15,000 (TURN OVER] MBA5903 OCTOBER/NOVEMBER 2019 Required: Using a 15 percent interest rate, convert this series of irregular cash flows to an equivalent (in present value terms) 3-year annuity [19 Marks] Question 7 Suppose that a portfolio consists of the following shares Share Amount Beta Chevron R20,000 0.7 General Electric R40,000 1,3 Whirlpool R40.000 1,1 The risk-free rate (ro) 15 5 percent and the market risk premium (m-) is 8 8 percent Required: 71 Determine the beta for the portfolio (2) 72 Determine how much General Electric share one must sell and reinvest in Chevron share to reduce the beta portfolio to 1 00 (7) 73 Determine the expected return on the portfolio in Part 71 and 72 (10) Question 8 [14 Marks] Trek Minerals is evaluating a new production process Two alternative pieces of equipment are available Alternative P costs R100,000, has 10-year life, and is expected to generate annual cash inflows of R22,000 in each of the 10 years Alternative R costs R85,000. has an 8-year life and is expected to generate annual cash inflows of R18,000 in each of 8 years Trek Mineral's weighted average cost of capital is 12 percent Required: Using the equivalent annual annuity method, which alternative should be chosen? EXTERNAL EXAMINER DR T MOKOALELI-MOKOTELI UNISA 2019