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2(a) You are newly recruited as a financial manager of John Sum Health Care company which is listed in Hong Kong. The senior executives of
2(a) You are newly recruited as a financial manager of John Sum Health Care company which is listed in Hong Kong. The senior executives of the company including your supervisor, the Chief Financial Officer are granted with company shares in their managerial compensation. During a weekly finance department meeting, the Chief Financial Officer asked you, Is it important for the financial market to be efficient to the company? Why? How does the market efficiency relate to the goal(s) of financial managers and the capital investment as well as financial decisions we need to make? Respond to your supervisor. Illustrate your answer with example(s). (12 marks) (b) You are appointed as a financial analyst for Great Puzzle Company. Recently, the company is planning to purchase a new moulding machine to replace the existing one. The new machine costs $32,500,000 and has an economic life of 4 years. The current book value and the salvage value today of the existing moulding machine are respectively $26,500,000 and $27,000,000. The existing moulding still has four years of economic life left. The annual depreciation for these two machines are calculated using a straight line depreciation method. Both machines will have zero salvage value in four years. There will be an annual cost saving of $2,050,000 if the current machine is replaced by the new machine. Net working capital of $560,000 will be needed immediately if the new moulding machine is purchased. The company has a 34% tax rate. Suppose the required rate of return on this investment is 12%. Should the company replace the current moulding machine with a new one? Calculate the net present value of the decision of replacing the existing moulding machine. (13 marks)
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