Module Assessment Components In the following pages, further details of each assessment component are presented along with expectations in relation to prior preparation and completion. 1. Assessment 1 (Assignment) This assignment is designed to test students on Topic 28 (Value Drivers) and on Topic 7 (Investment Appraisal). For Question 1, students are required to conduct share valuation and to assess the advantages and disadvantages of various approaches to share valuation. For Question 2, students are expected to appraise the attractiveness of a capital asset proposal. The emphasis is on deriving the relevant cash flows using the concepts of inflation and tax payments, so as to make a reasoned recommendation. Question 1 [25 marks) The directors of Hellcat plc ('Hellcar) are considering making a bid for Zero ple (Zero"), a firm with some financial difficulties in the same industry. Hellcat's takeover specialist has prepared the following information for the past 4 years: Hellcat Year 2016 2013 2014 2015 Final dividend per share (cents) 12 12 13 10 Payout ratio (percent) 20 30 25 10.00 Year-end share price ($) 10 13.20 9.00 Zero Balance sheet extract: Assets Cash $10 m $2m $1m Plant, property and equipment (PPE) Inventory Accounts receivables Others $1m $15 m Shares issued (par $10) Bonds $10 m $5m $15 m 21 Equity beta Treasury bill yield Return on the market Prospective EPS Pay-out ratio -0.7 -5% 12% -5.36 cents - 25% Required: a Calculate the intrinsic value of Zero's share with these three methods: i. Price-earnings approach using Hellcat's average eamings multiple. i. Dividend discount model, assuming that both companies have the same dividend growth rate. . Net realizable vallue (NRV) approach, assuming that Zero's PPE is worth 20 percent above its book value and current assets are valued at a 30 percent discount to book value. b. Hellcat's directors prefer to use the NRV approach whereas the takeover specialist proposed that value is derived from the dividend discount model. Critical discuss the rationale of each parties' proposal. c. Compare and contrast the discounted cash flow to equity approach and the Dividend Discount Model approach to share valuation inamerger station Note: 15 marks (out of the total of 25 marks) are allocated to part b and part e. Question 2 (15 marks] A company's project requires the purchase of a machine which costs 300,000, which is payable immediately, In today's value, the incremental cash infiows arising from the projedt are 1 million per annum. The project lasts two years, at the end of which the machine's re- sale value is estimated to be the same as the asset's net book value at the time of sale. The inland revenue department's tax alowance for machines of this nature is 25% on a reducing balance basis. The tax rate is 10%, where taxes are payable half in the current year and the balance is due one year in arrears. The company's cost of capital before tax is 12%. The general rate of inflation in the country is 5%. 22 Required: Make a recommendation if the project should be adopted based of its Net Present Value. Hint: Compute the tax payments each year, then find the tax savings each year due to capital allowance. Lastiy, derive the yearty cash flows and find the NPV using the actual cost of capital Module Assessment Components In the following pages, further details of each assessment component are presented along with expectations in relation to prior preparation and completion. 1. Assessment 1 (Assignment) This assignment is designed to test students on Topic 28 (Value Drivers) and on Topic 7 (Investment Appraisal). For Question 1, students are required to conduct share valuation and to assess the advantages and disadvantages of various approaches to share valuation. For Question 2, students are expected to appraise the attractiveness of a capital asset proposal. The emphasis is on deriving the relevant cash flows using the concepts of inflation and tax payments, so as to make a reasoned recommendation. Question 1 [25 marks) The directors of Hellcat plc ('Hellcar) are considering making a bid for Zero ple (Zero"), a firm with some financial difficulties in the same industry. Hellcat's takeover specialist has prepared the following information for the past 4 years: Hellcat Year 2016 2013 2014 2015 Final dividend per share (cents) 12 12 13 10 Payout ratio (percent) 20 30 25 10.00 Year-end share price ($) 10 13.20 9.00 Zero Balance sheet extract: Assets Cash $10 m $2m $1m Plant, property and equipment (PPE) Inventory Accounts receivables Others $1m $15 m Shares issued (par $10) Bonds $10 m $5m $15 m 21 Equity beta Treasury bill yield Return on the market Prospective EPS Pay-out ratio -0.7 -5% 12% -5.36 cents - 25% Required: a Calculate the intrinsic value of Zero's share with these three methods: i. Price-earnings approach using Hellcat's average eamings multiple. i. Dividend discount model, assuming that both companies have the same dividend growth rate. . Net realizable vallue (NRV) approach, assuming that Zero's PPE is worth 20 percent above its book value and current assets are valued at a 30 percent discount to book value. b. Hellcat's directors prefer to use the NRV approach whereas the takeover specialist proposed that value is derived from the dividend discount model. Critical discuss the rationale of each parties' proposal. c. Compare and contrast the discounted cash flow to equity approach and the Dividend Discount Model approach to share valuation inamerger station Note: 15 marks (out of the total of 25 marks) are allocated to part b and part e. Question 2 (15 marks] A company's project requires the purchase of a machine which costs 300,000, which is payable immediately, In today's value, the incremental cash infiows arising from the projedt are 1 million per annum. The project lasts two years, at the end of which the machine's re- sale value is estimated to be the same as the asset's net book value at the time of sale. The inland revenue department's tax alowance for machines of this nature is 25% on a reducing balance basis. The tax rate is 10%, where taxes are payable half in the current year and the balance is due one year in arrears. The company's cost of capital before tax is 12%. The general rate of inflation in the country is 5%. 22 Required: Make a recommendation if the project should be adopted based of its Net Present Value. Hint: Compute the tax payments each year, then find the tax savings each year due to capital allowance. Lastiy, derive the yearty cash flows and find the NPV using the actual cost of capital