(a) Using annuity tables and calculate the present value of the following cash flows:

i. P2,000 per year will be received for 3 years at a rate of discount of 7%. (2 marks)

ii. P6,000 received for six years : times 1-3 then times 6-8 Discount rate 12% (6 marks)

iii. A company will pay rent of P 30,000 for 99 [LM1] years. the rent will begin in year 3 discount rate 8%(2 marks)[LM2]

(b) A new machine cost P500, 000 and will produce net cash inflows of P150, 000 per annum for eight years, starting at time 3. The machine will be located in an old building which cost P1m six years ago. The building could now be sold for P2m or P4 m at the end of the project.

In addition to the costs above, the use of the manufacturing process the company will have to pay a royalty of P 1,000 per annum for 100 years , starting now for the use of the patent.

Using the NPV method and discount rate 12% appraise the project. (10 marks)

c. On 1 February 2001 a ban issued 10%coupon interest rate, 20 year bond with P60, 000 par value that pay interest annually. The market rate of interest is 10%. Calculate the value of the bond (5 marks)

A Bank on 1 February 2001, issued 10% coupon interest rate, 20 year bond with a P60 000 par value that pays interest annually. The market rate of interest is 10%. Calculate the value of the bond (5 marks)

d. B Pty Ltd wishes to buy P Pty Ltd for P1.92m. Information from B Pty Ltd statement of financial position is shown below:

Equity and liabilities P000

Shares (P1.00 par value) 2,000

Reserves 1,650

3,650

Non- current liabilities

8% loan notes 2,500

Current liabilities 1,100

Total equity and liabilities 7,650

e.Discuss the factors that B Pty Ltd could consider, in its circumstances, in choosing between equity finance and debt finance as a source of finance from which to make a ach offer for P Pty Ltd (5 marks)

f. BIHL Pty Ltd has issued 10% convertible bonds which are due to be redeemed in four years at a 15% premium. They are currently quoted at P88 per P100 nominal. P100 nominal can be converted into shares in four years. The share price of the company is currently P5.00 and is expected to grow at a rate of 4%. Assume a 30% tax rate. The company uses 20% for interpolation purposes.

Required:

Calculate the cost of the convertible debt. (10 marks)