ATTEMPT ALL QUESTIONS Question 1 Ori plc is evaluating two projects. The first involves $ 4.725m expenditure on new machinery to expand the company's existing operations in the textile industry. The second is the diversification into the packing industry and will cost $ 9.275m Ori's summarized balance sheet and those of Canall plc and Sealalot plc companies in the packaging industry are shown below. Canall plc ($m) Ori plc (Sm) 96 Sealalot plc(sm) 76 42 Fixed Assets Current Assets 82 65 70 (48) Less Current Liabilities (70) (72) 52 93 121 10 30 15 Financed by: Ordinary shares Reserves Medium and long term loans 27 50 50 15 13 56 121 52 93 56 15 13 121 52 93 180 230 380 Ordinary share price (pence) 112 Debenture (S) 104 1.3 1.2 Equity beta 1 Ori and Sealalot 50 pence par value. Cannal 25 pence par value 2. On 12% debentures 1998-2000, Canall 1496 debentures 2003, Sealalet medium term bank loan 5.1.6 8.9. 10- 1 11.1 12. 1.1.1.2.1 131 14. 1 .15: 1 1.2 1.3 1.2 Equity beta 1. Ori and Sealalot 50 pence par value, Cannal 25 pence par value 2. Ori 12% debentures 1998-2000, Canall 14% debentures 2003, Sealalot medium term bank loan Ori proposes to finance the expansion of textile operations with a $ 4.725 m 11% loan stock issue, and the packaging investment with a $ 9.275 m rights issue at a discount of 10% on the current market price. Issue cost may be ignored. Ori's managers are proposing to use a discount rate of 15% per year to evaluate each of these projects. The risk-free rate of interest is estimated to be 6% per year and the market return 14% per year. Corporate tax is at the rate of 33% per year. Required a. Determine whether 15% per year is an appropriate discount rate to use for each of these projects. Explain your answer and state clearly any assumptions that you make b. Ori's marketing director suggests that it is incorrect to use the same discount rate each year for the investment in packaging as the early stages are riskier and should be discounted at a higher rate. Another board member disagrees saying that more distant cash flows are riskier and should be discounted at a higher rate. Discuss the validity of the views of each of the directors I ATTEMPT ALL QUESTIONS Question 1 Ori plc is evaluating two projects. The first involves $ 4.725m expenditure on new machinery to expand the company's existing operations in the textile industry. The second is the diversification into the packing industry and will cost $ 9.275m Ori's summarized balance sheet and those of Canall plc and Sealalot plc companies in the packaging industry are shown below. Canall plc ($m) Ori plc (Sm) 96 Sealalot plc(sm) 76 42 Fixed Assets Current Assets 82 65 70 (48) Less Current Liabilities (70) (72) 52 93 121 10 30 15 Financed by: Ordinary shares Reserves Medium and long term loans 27 50 50 15 13 56 121 52 93 56 15 13 121 52 93 180 230 380 Ordinary share price (pence) 112 Debenture (S) 104 1.3 1.2 Equity beta 1 Ori and Sealalot 50 pence par value. Cannal 25 pence par value 2. On 12% debentures 1998-2000, Canall 1496 debentures 2003, Sealalet medium term bank loan 5.1.6 8.9. 10- 1 11.1 12. 1.1.1.2.1 131 14. 1 .15: 1 1.2 1.3 1.2 Equity beta 1. Ori and Sealalot 50 pence par value, Cannal 25 pence par value 2. Ori 12% debentures 1998-2000, Canall 14% debentures 2003, Sealalot medium term bank loan Ori proposes to finance the expansion of textile operations with a $ 4.725 m 11% loan stock issue, and the packaging investment with a $ 9.275 m rights issue at a discount of 10% on the current market price. Issue cost may be ignored. Ori's managers are proposing to use a discount rate of 15% per year to evaluate each of these projects. The risk-free rate of interest is estimated to be 6% per year and the market return 14% per year. Corporate tax is at the rate of 33% per year. Required a. Determine whether 15% per year is an appropriate discount rate to use for each of these projects. Explain your answer and state clearly any assumptions that you make b. Ori's marketing director suggests that it is incorrect to use the same discount rate each year for the investment in packaging as the early stages are riskier and should be discounted at a higher rate. Another board member disagrees saying that more distant cash flows are riskier and should be discounted at a higher rate. Discuss the validity of the views of each of the directors