Kindly provide accurate solutions to the following assignment
Max Lid. Mini Lid. Annual sales (millions) Shs 750 Shs 90 Net income (millions) Shs 60 Shs 7.50 Ordinary shares outstanding (millions) 15 3 Earnings per share (EPS) Shs 4 Shs 2.50 Market price per share Shs 44 Shs 20 Both companies are in the 40% income tax bracket. REQUIRED: i. Calculate the maximum exchange ratio Max Led. should agree to if it expects no dilution in EPS. (6 marks) ii. How much premium would the shareholders of Mini Lid. receive on a price of Shs 24.20. (4 marks) b. Calculate Maxi Lid's post merger EPS if the two companies settled on a price of Shs 24.20. (4 marks) Calculate Max Ltd's EPS if Mini Led. shareholders accept one Shs 6 convertible preference share (stated value Shs 100) for every 5 ordinary shares they own. (4 marks) d. Calculate Maxi Lid's EPS if every 50 shares of Mini Led. are exchanged for one 8% debenture of par value Shis 1,000. (4 marks) What one fundamental assumption have you made in your calculations in b., c. and d. above? (2 marks)A piece of equipment requiring the investment of 2.2 million is being considered by Charo Foods Lid. The equipment has a ten-year useful life and an expected salvage value of Sh 200,000. The company uses the straight-line method of depreciation for analysing investment decisions and faces a tax rate of 40%. For simplicity assume that the depreciation method is acceptable for tax purposes. A pessimistic forecast projects cash earnings before depreciation and taxes at Sh 400,000 per year compared with an optimistic estimate of Sh 500,000 per year. The probability associated with the pessimistic estimate is 0.4 and 0.6 for the optimistic forecast. The company has a policy of using a hurdle rate of 10% for replacement investments, 12% (its cost of capital) for revenue expansion investments into existing product lines and 15% projects involving new areas or new product lines. REQUIRED: (a) Compute the expected annual cash flows associated with the proposed equipment investments. (4 marks) (b) Would you recommend acceptance of this project if it involved expansion of sales for an existing product? (5 marks) Would it be acceptable if it was for the replacement of equipment with a book value of Sh 200,000 at the end of the tenth year but which could be sold at that time for only Sh 40,000? (5 marks) (d) Discounted cashflow methods were developed for idealised settings of complete and perfect capital, factor and commodity markets. Explain what complications arise when an attempt is made to apply these methods in real life markets that are neither complete nor perfect. (6 marks) (Total: 20 marks)A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh 10,000 each and with a useful life of 5 years. The company required rate of return is 10% and the appropriate corporate tax rate is 50% The projects will be depreciated on a straight line basis. The before depreciation and taxes cashflows expected to be generated by the projects are as follows. YEAR 2 3 Project A Shs 4,000 4,000 4,000 4.000 4,000 Project B Shs 6,000 3,000 2000 5,000 5,000 Required: Calculate for each project 1 . The payback period ii. The average rate of return i11. The net present value IV. Profitability index V. The internal rate of return Which project should be accepted? Why
