Hi Experts, it is a big question, do question a & b first, i will post again.

You must answer ALL the questions. (Total 100 marks) You just graduated from a university renowned for its rigorous finance courses and recently landed a job as a corporate finance analyst for Designer Furnitures (DF) Ltd, a company that deals primarily in furniture retail and interior design. KK Poon, one of the two co-founders of the company, is concerned about the threat that online retailing has posed to the company and has tasked you to look into the company's financial health and operating performance. You extract the company's historical balance sheet and income statement information (Exhibit A) and work out some preliminary ratios (Exhibit B). In light of the current trends, DF Ltd is exploring two potential e-business opportunities. The first opportunity (Project A) is to develop an online retail presence as an additional channel to distribute their furniture while the second (Project is to provide a subscription service for crowd-sourced interior design ideas. Unfortunately, the window of opportunity is closing on both of these opportunities and DF Ltd can only capitalise on one of them. KK Poon needs your help with this second task and shows you the three-year revenue projections for both opportunities (he insists any crystal ball is too foggy beyond 3 years): Year Project A Project B Revenue (in $ millions) 1 3 3 8 12 8 6 3 He also mentions that variable cost 60% of sales for the first project and 30% of sales for the second, with respective annual fixed cash costs of $2m and $4m. As these are web-based projects, the hardware and software solutions can be leased as needed, so there is no capital expenditure required and working capital requirements are minimal. DF Ltd currently has 200 million shares priced at $0.50 each and no debt. KK Poon, however, is considering issuing, and rolling over indefinitely, 20,000 3% annual-coupon, ten-year bonds with a face value of $1,000 each. The bonds will be issued at a price of $900 each and the bond proceeds will then be used to repurchase shares. KK Poon tells you that the yield on these bonds is either 2.75% or 4.25% but refuses to tell you which number is correct. As you nervously pop candies into your mouth from a bag that reads "melts in your hands, not in your mouth", KK Poon tasks you to think through the implications of this capital restructuring. You figure you will need some equity inforination as well. Your research reveals that DF Ltd's beta is 0.7 and an all-equity online information service provider with a subscription-based revenue model has a beta of 0.3. Based on historical performance, you expect the stock market to have a 10% annual return. In your quest, you also find out that the promised return on the deposit account of a local bank is 2% per annum whereas the annual yield on a 10-year government bond is 4.25%. The marginal corporate tax rate for DF Ltd is 20%. FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2019 Page 2 of 9 As a final task, you are roped in for next year's cash budgeting exercise. Furniture is typically purchased a quarter prior to its sale at 60% of the revenue. The forecasted revenue for the coming quarters is as follows: Revenue (in $ millions) 2018 Q1 19.09 Q2 18.79 Q3 18.75 Q4 38.37 2019 Q1 18.16 JJ Lin, the other co-founder of the company, is also the largest shareholder of the company with his 50.01% ownership stake. Although he has recently retired, he still spends a significant amount of time bickering with KK Poon on the appropriate direction in which to take the company. The rest of his time is spent living it up, realising only recently that his financial resources are running dangerously low. DF Ltd has never paid a dividend, however. When you met JJ Lin, who invited you to one of his yacht parties, he mentioned that he is considering the use of "homemade" dividends-instead of needing DF Ltd to pay a dividend, he can sell some shares to effectively create a "dividend in years when he would like one. JJ Lin is a resident in a tax regime where dividends are taxed more than capital gains. FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2119 Page 3 of 9 EXHBT A: 2013 2014 2015 2016 2017 Balance Sheet as at financial year-end (in 9 millions) Assets Cash Accounts receivable Inventory Other current assets Total current assets 20 22 25 11 10 30 76 88 7 13 77 185 105 105 16 2 22B 93 9 18 24 143 14 68 Nel fixed assets 13 12 5 19 2 Other long-termassels 7 4 3 2 32 Total assers 86 92 193 248 177 Liabilities and Equity Accounts payable Other current liabilities Total curent liabilities 7 30 36 6 22 29 30 34 63 17 33 50 7 33 40 Long-term debt 10 17 38 83 D Other long-term iabilities 3 0 13 14 8 Conmon stock and additional paid-in capital Relained earnings Total equity 22 16 37 23 22 45 26 53 79 31 71 102 37 92 128 Total liabilities and equity 86 92 193 248 177 Income Statement in $ millions) 2013 2014 2015 2016 2017 Revenue Cost of goods sold Gross profit 69.0 40.6 28.35 109.3 69,8 39.49 77.7 49.3 28.37 84.7 54.2 30.53 926 60.0 32.67 Seling, general, and admin expenses Depreciation expense Operating profit 34.0 0 (5.69) 30.2 0 9.29 32.7 0 (4.35) 33.9 0 (3.41) 35.4 0 (2.72) Interest expense 0.1 0.3 0.1 0.2 0.1 Other non-operating income 39.09 12.77 26.BB 20.38 19.55 Earnings bolore laxes 21.76 22.43 16.77 16.73 Taxes 13 2.7 0.3 0.2 1.4 Net Income 32.04 19.07 22.15 16.62 15.31 FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2019 Page 4 of 9 EXHIBIT B Financial Ratios 2013 2014 2015 2016 2017 Current ratio Quick ratio Cash ratio 1.81 1.55 0.56 2.65 2.29 0.86 2.92 2.72 1.39 4.52 4.21 2.09 3.55 3.09 2.30 0.27 Total debt ratio (Total liabilties/Total assets) Long-term debt ratio (Long-term debt/Total assets) Equity multiplier Times interest earned 0.57 0.11 232 n.m 0.50 0.19 2.01 30.96 0.59 0.20 2.45 n.m. 0.59 0.33 2.44 n.m 1.38 n.m Total asset turnover Days' sales in inventory Days' sales in receivables Days' sales in payables 0.80 83.30 118.37 60.93 1.19 52.76 36.36 32.74 0.40 95.48 33.77 218.82 0.34 104.80 451.38 117.63 0.52 112.36 33.77 43.43 Gross margin (Gross profit/Total revenue) Operating margin (Operating profit/Total revenue) Profit margin 0.41 -0.08 0.48 0.36 0.08 0.17 0.37 -0.06 0.29 0.36 -0.04 0.20 0.35 -0.03 0.17 Relurn on assels Return on equity 0.37 0.88 0.21 042 0.11 0.28 0.07 0.16 0.09 0.12 (a) Based on the information in Exhibits A and B, evaluate and assess DF Ltd's financial health and operating performance, (15 marks) (b) Without calculating, is it possible to infer the yield-to-maturity on DF Ltd's bonds? If so, appraise fully how. If not, appraise fully why not. (5 marks) (c) Discuss and explain whether firm value and equity value will increase, decrease, or remain unchanged by the proposed capital restructuring, (5 marks) (d) Identify and discuss the key considerations when determining a suitable cost(s) of equity for the projects. (10 marks) (e) Synthesize your ideas from parts (b) through (d) to derive an appropriate estimation of a discount rate for Project B. State any assumptions used. (15 marks) Compare the suitability of the NPV and IRR approaches for evaluating the two (2) projects and evaluate which of the two projects DF Ltd should pursue. KK Poon throws you a bone and asks you to use 7.96% as a discount rate for Project A. (20 marks) Prepare and construct a cash budget for DF Ltd. (20 marks) FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2019 Page 5 of 9 (h) Critically evaluate JJ Lin's idea of using "homemade" dividends. (10 marks) ----- END OF PAPER ---- FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2119 Page 6 of 9 You must answer ALL the questions. (Total 100 marks) You just graduated from a university renowned for its rigorous finance courses and recently landed a job as a corporate finance analyst for Designer Furnitures (DF) Ltd, a company that deals primarily in furniture retail and interior design. KK Poon, one of the two co-founders of the company, is concerned about the threat that online retailing has posed to the company and has tasked you to look into the company's financial health and operating performance. You extract the company's historical balance sheet and income statement information (Exhibit A) and work out some preliminary ratios (Exhibit B). In light of the current trends, DF Ltd is exploring two potential e-business opportunities. The first opportunity (Project A) is to develop an online retail presence as an additional channel to distribute their furniture while the second (Project is to provide a subscription service for crowd-sourced interior design ideas. Unfortunately, the window of opportunity is closing on both of these opportunities and DF Ltd can only capitalise on one of them. KK Poon needs your help with this second task and shows you the three-year revenue projections for both opportunities (he insists any crystal ball is too foggy beyond 3 years): Year Project A Project B Revenue (in $ millions) 1 3 3 8 12 8 6 3 He also mentions that variable cost 60% of sales for the first project and 30% of sales for the second, with respective annual fixed cash costs of $2m and $4m. As these are web-based projects, the hardware and software solutions can be leased as needed, so there is no capital expenditure required and working capital requirements are minimal. DF Ltd currently has 200 million shares priced at $0.50 each and no debt. KK Poon, however, is considering issuing, and rolling over indefinitely, 20,000 3% annual-coupon, ten-year bonds with a face value of $1,000 each. The bonds will be issued at a price of $900 each and the bond proceeds will then be used to repurchase shares. KK Poon tells you that the yield on these bonds is either 2.75% or 4.25% but refuses to tell you which number is correct. As you nervously pop candies into your mouth from a bag that reads "melts in your hands, not in your mouth", KK Poon tasks you to think through the implications of this capital restructuring. You figure you will need some equity inforination as well. Your research reveals that DF Ltd's beta is 0.7 and an all-equity online information service provider with a subscription-based revenue model has a beta of 0.3. Based on historical performance, you expect the stock market to have a 10% annual return. In your quest, you also find out that the promised return on the deposit account of a local bank is 2% per annum whereas the annual yield on a 10-year government bond is 4.25%. The marginal corporate tax rate for DF Ltd is 20%. FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2019 Page 2 of 9 As a final task, you are roped in for next year's cash budgeting exercise. Furniture is typically purchased a quarter prior to its sale at 60% of the revenue. The forecasted revenue for the coming quarters is as follows: Revenue (in $ millions) 2018 Q1 19.09 Q2 18.79 Q3 18.75 Q4 38.37 2019 Q1 18.16 JJ Lin, the other co-founder of the company, is also the largest shareholder of the company with his 50.01% ownership stake. Although he has recently retired, he still spends a significant amount of time bickering with KK Poon on the appropriate direction in which to take the company. The rest of his time is spent living it up, realising only recently that his financial resources are running dangerously low. DF Ltd has never paid a dividend, however. When you met JJ Lin, who invited you to one of his yacht parties, he mentioned that he is considering the use of "homemade" dividends-instead of needing DF Ltd to pay a dividend, he can sell some shares to effectively create a "dividend in years when he would like one. JJ Lin is a resident in a tax regime where dividends are taxed more than capital gains. FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2119 Page 3 of 9 EXHBT A: 2013 2014 2015 2016 2017 Balance Sheet as at financial year-end (in 9 millions) Assets Cash Accounts receivable Inventory Other current assets Total current assets 20 22 25 11 10 30 76 88 7 13 77 185 105 105 16 2 22B 93 9 18 24 143 14 68 Nel fixed assets 13 12 5 19 2 Other long-termassels 7 4 3 2 32 Total assers 86 92 193 248 177 Liabilities and Equity Accounts payable Other current liabilities Total curent liabilities 7 30 36 6 22 29 30 34 63 17 33 50 7 33 40 Long-term debt 10 17 38 83 D Other long-term iabilities 3 0 13 14 8 Conmon stock and additional paid-in capital Relained earnings Total equity 22 16 37 23 22 45 26 53 79 31 71 102 37 92 128 Total liabilities and equity 86 92 193 248 177 Income Statement in $ millions) 2013 2014 2015 2016 2017 Revenue Cost of goods sold Gross profit 69.0 40.6 28.35 109.3 69,8 39.49 77.7 49.3 28.37 84.7 54.2 30.53 926 60.0 32.67 Seling, general, and admin expenses Depreciation expense Operating profit 34.0 0 (5.69) 30.2 0 9.29 32.7 0 (4.35) 33.9 0 (3.41) 35.4 0 (2.72) Interest expense 0.1 0.3 0.1 0.2 0.1 Other non-operating income 39.09 12.77 26.BB 20.38 19.55 Earnings bolore laxes 21.76 22.43 16.77 16.73 Taxes 13 2.7 0.3 0.2 1.4 Net Income 32.04 19.07 22.15 16.62 15.31 FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2019 Page 4 of 9 EXHIBIT B Financial Ratios 2013 2014 2015 2016 2017 Current ratio Quick ratio Cash ratio 1.81 1.55 0.56 2.65 2.29 0.86 2.92 2.72 1.39 4.52 4.21 2.09 3.55 3.09 2.30 0.27 Total debt ratio (Total liabilties/Total assets) Long-term debt ratio (Long-term debt/Total assets) Equity multiplier Times interest earned 0.57 0.11 232 n.m 0.50 0.19 2.01 30.96 0.59 0.20 2.45 n.m. 0.59 0.33 2.44 n.m 1.38 n.m Total asset turnover Days' sales in inventory Days' sales in receivables Days' sales in payables 0.80 83.30 118.37 60.93 1.19 52.76 36.36 32.74 0.40 95.48 33.77 218.82 0.34 104.80 451.38 117.63 0.52 112.36 33.77 43.43 Gross margin (Gross profit/Total revenue) Operating margin (Operating profit/Total revenue) Profit margin 0.41 -0.08 0.48 0.36 0.08 0.17 0.37 -0.06 0.29 0.36 -0.04 0.20 0.35 -0.03 0.17 Relurn on assels Return on equity 0.37 0.88 0.21 042 0.11 0.28 0.07 0.16 0.09 0.12 (a) Based on the information in Exhibits A and B, evaluate and assess DF Ltd's financial health and operating performance, (15 marks) (b) Without calculating, is it possible to infer the yield-to-maturity on DF Ltd's bonds? If so, appraise fully how. If not, appraise fully why not. (5 marks) (c) Discuss and explain whether firm value and equity value will increase, decrease, or remain unchanged by the proposed capital restructuring, (5 marks) (d) Identify and discuss the key considerations when determining a suitable cost(s) of equity for the projects. (10 marks) (e) Synthesize your ideas from parts (b) through (d) to derive an appropriate estimation of a discount rate for Project B. State any assumptions used. (15 marks) Compare the suitability of the NPV and IRR approaches for evaluating the two (2) projects and evaluate which of the two projects DF Ltd should pursue. KK Poon throws you a bone and asks you to use 7.96% as a discount rate for Project A. (20 marks) Prepare and construct a cash budget for DF Ltd. (20 marks) FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2019 Page 5 of 9 (h) Critically evaluate JJ Lin's idea of using "homemade" dividends. (10 marks) ----- END OF PAPER ---- FIN303 Copyright 2019 Singapore University of Social Sciences (SUSS) Examination July Semester 2119 Page 6 of 9