a) Extracts from the Statement of Financial Position of Crafty plc: Year ended 30 June 2020 Year ended 30 June 2021 25,000,000 25,000,000 Ordinary share capital (50p per share nominal value) Retained Earnings 6,344,000 17,934,000 Bank loan (8%) 16,000,000 14,000,000 The current market value of the ordinary shares is 1.80. At 30 June 2020, the market value of each share was 1.50. In recent years, Crafty plc has had a cost of capital for equity at 11%, but the directors consider that this rate has fallen by two percentage points in 2021. Crafty plc has used an overall cost of capital of 10.50% in the last few years to appraise investment projects. Explain why the 10.50% of the cost of capital is no longer appropriate to be used for decision making and calculate the new weighted average cost of capital which reflects Crafty plc's latest situation and performance. (6 marks) b) Calculate the Net Present Value (NPV) of investing in one of the new stores and advise whether the investment is financially acceptable, giving reasons for your answer. You should use the weighted average cost of capital identified in Part (a) above, rounded to the nearest whole number, for the NPV calculation. You can assume that the expected costs and revenue of each of the new stores are the same and for this part you only need to calculate the NPV for one store. (13 marks) c) One of the directors of Crafty plc is concerned that opening the stores will not be as successful as has been predicted. The Covid-19 pandemic will have changed people's habits and they will not return to high street shopping as much as anticipated. Calculate the sensitivity of the project to a change in the sales revenue, and then explain briefly what this sensitivity figure means to the company. (6 marks) (Total: 25 marks) a) Extracts from the Statement of Financial Position of Crafty plc: Year ended 30 June 2020 Year ended 30 June 2021 25,000,000 25,000,000 Ordinary share capital (50p per share nominal value) Retained Earnings 6,344,000 17,934,000 Bank loan (8%) 16,000,000 14,000,000 The current market value of the ordinary shares is 1.80. At 30 June 2020, the market value of each share was 1.50. In recent years, Crafty plc has had a cost of capital for equity at 11%, but the directors consider that this rate has fallen by two percentage points in 2021. Crafty plc has used an overall cost of capital of 10.50% in the last few years to appraise investment projects. Explain why the 10.50% of the cost of capital is no longer appropriate to be used for decision making and calculate the new weighted average cost of capital which reflects Crafty plc's latest situation and performance. (6 marks) b) Calculate the Net Present Value (NPV) of investing in one of the new stores and advise whether the investment is financially acceptable, giving reasons for your answer. You should use the weighted average cost of capital identified in Part (a) above, rounded to the nearest whole number, for the NPV calculation. You can assume that the expected costs and revenue of each of the new stores are the same and for this part you only need to calculate the NPV for one store. (13 marks) c) One of the directors of Crafty plc is concerned that opening the stores will not be as successful as has been predicted. The Covid-19 pandemic will have changed people's habits and they will not return to high street shopping as much as anticipated. Calculate the sensitivity of the project to a change in the sales revenue, and then explain briefly what this sensitivity figure means to the company. (6 marks) (Total: 25 marks)
