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T U ASSIGNMENT 1: CAPITAL BUDGETING ABC LTD BALANCE SHEETS AS AT 31 DECEMBER ($000) 2015 2016 2017 2018 2015 2016 2017 2018 ASSETS Current Assets Cash Account Receivable Inventory Prepaid Expense Total Current Assets 515 106 212 22 855 115 220 18 775 WEWP LIABILITIES Current Liabilities Bank Overdraft Account Payable Income Tax Payable Dividend Payable Total Current Liabilities 458 113 179 17 767 186 15 801 23 104 97 229 453 24 105 73 146 348 2 25 106 70 129 329 24 107 65 130 326 Non-current Assets Land and Building Motor Vehicles less Depreciation Plant and Equipment less Depreciation Furniture, Fixtures and Fittings less Depreciation Total Non-current Assets MU5 1,310 160 1310 160 8 480 122) 150 (15) 2,055 1.310 160 124 571 169) 155 1,310 160 40) 599 (1251 160 35) 2029 (56) Non-current Liabilities Bank Loans Mortgage Loans Corporate Loans Total Non-current Liabilities 658 341 670 1,669 658 307 670 1.635 658 292 670 1620 658 260 670 1588 683 (185) 165 (45) 2.032 TOTAL LIABILITIES 2.122 1983 1949 1914 2 078 SHAREHOLDERS' EQUITY Ordinary Shares Preference Shares Retained Earnings Total Shareholders' Equity 502 502 175 111 788 175 193 870 502 175 204 881 502 175 208 895 TOTAL ASSETS 2,910 2.853 2,830 2.799 TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY 2.910 2.853 2.830 2799 ABC LTD PROFIT AND LOSS STATEMENTS FOR THE YEARS ENDING 31 DECEMBER ($000) ABC LTD STATEMENTS OF CASHFLOWS FOR THE YEARS ENDING 31 DECEMBER ($000) 2016 2017 2018 Sales Cost of Good Sold (Cost of Sales) Gross Profit Wages Pent + ABC Financial Statements 2016 2,191 (1.306) 885 (308) 1891 2017 2,100 (1,332) 768 (302) 1891 2018 2,376 (1371) 1,005 (399) 1891 CASHFLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash paid to suppliers Cash expenses linterest paid 2.166 (1045) (847) 2 293 (1000) 17471 2054 (890) 18271 69 2016 N P R U V D E M F G H 31 2.853 2.910 2.830 2.799 TOTAL ASSETS 2.910 2.853 2,830 2,799 TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY ABC LTD PROFIT AND LOSS STATEMENTS FOR THE YEARS ENDING 31 DECEMBER ($000) ABC LTD STATEMENTS OF CASHFLOWS FOR THE YEARS ENDING 31 DECEMBER ($000) 88982 2016 2017 2018 2017 2.100 (1.332) 768 (302) 2.054 2293 (1000) 747) 105) (89) Sales Cost of Good Sold Cost of Sales Gross Profit Wages Pent Motoveracle running expenses Heating and Lighting Telephone: postage and Internet Depreciation Total Operating Expenses Operating Profit (EBIT) Interest Profit Before Tax Taz (3074 Net Profit 2016 2.191 (1306) 885 (308) (89) (35 (28) ( (73) 579) 306 73) 233 (70) 163 2 166 (1045) (847) (108) (87) (18) 67 (827 1103 1361 17) 187 2018 2.376 (1371) 1,005 (399) (89) (39) (26) (41) (86) 1680) 325 (70) 255 (77) 179 (15) 356 8 46 w www 28 25 (42) (82) (577) 191 (71 120 (36) 84 124 CASHFLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash paid to suppliers Cash expenses Interest paid Tax paid Prepaid expenses Net cash provided by operating activities CASHFLOWS FROM INVESTING ACTIVITIES Plant and Equipment Furniture, Fixtures and Fittings Net cash provided by investing activities CASHFLOWS FROM FINANCING ACTIVITIES Bank Overdraft Mortgage Loan Repayments Buyback of Shares Dividend Paid Net cash provided by financing activities Net increase in cash + Opening Cash - Closing Cash (44) 5 (39) 33 19 (371 858 E3. $8 134) 5 , 8 Ordinary Dividend Pad Preference Dividerd Pad Dividend Pad 85 20 105 84 20 104 90 20 110 (83) (121) 1931 515 422 1851 120) 269 422 490 (84) (175) 46 480 458 Purchases 1029 1173 1036 Ordinary Share price ($) Number of Ordinary Share thousand) 2.05 245 210 245 232 245 Preference Share price ($) Number of Preference Share thousand) 136 All purchases and sales are on credit 132 195 145 155 Formatting Table Clipboard Font Alignment Number Styles Security Warning Automatic update of links has been disabled Options... A B D F 5 6 7 8 9 B5 f It is now Feb 2019. ABC Ltd has identified few potential projects that the firm could undertake, but is not sure how to determine the best projects to go ahead G 'M N U It is now Feb 2019 ABC Lid has identified few potential projects that the firm could undertake but is not sure how to determine the best projects to go ahead with You have explained to your client that the first task to do is to figure out the firm's Weighted w Average Cost of Capital (WACC), as it is the minimum return required on new projects in order to meet the cost of capital and increase the value of the firm Based on the most recent financial data in 2018 which has been provided in Assignment 2 you will help the firm to calculate its WACC based on the sources of capital shown in the 2018 Balance Sheet 10 11 12 13 You need to complete the following tasks in Cost of Capital tab. DIE 1 Determine the cost of all sources of capital cite all non-current liabilities ordinary shares, preference shares) - Note that Retained Earnings are not included, since all reserves, including retained earrings. belong to the owners of ordinary shares, and market value of ordinary shares has included the value of these reserves) 2 Determine the market value of all sources of capital (excluding Retained Earrings) 3. Calculate the firm's WACC 14 15 16 17 18 The interest rate on Bank Loan is 8.0% and interest rate on the Mortgage Coanis 110 DOBU Market value of Bank Loan and Mortgage Loan can be presumed to be the values in the 2018 Balance Sheet The corporate bond issued by the firm is rated A+ and require 165bsp above the 5-year Government Securities rate of 35% This bond is paying 6% coupon on annual basis and have 10 years to maturity CU HE The ordinary shares have a bela of 14 the risk-free rate applies for the CAPM to identify cost of equity is the 10-year Government Securities rate of 5 4% Market Risk Premium is 4% 20 21 22 24 The preference shares pay a fixed annual dividend of 10 cents per share EN 2011 After identifying the WACO the firmis considering about two projects. You will be in the position to recommend the acceptance or rejection of the project to your client EVE The project in question involves the acquisition of a new machine which will help the firm to increase its productivity of children toys. The firm has analysed the project and provided the following information as shown below. 28 You need to complete the following tasks in Capital Budgeting tab 1 Determine the incremental free cashflows if they would be accepted 2 Calculate the NPV of the incremental free cashflows. 3. Provide the firm with your recommendation to accept or reject the project Following is the project's information (all values are in thousands of dollars) 30 31 32 33 34 35 36 37 38 39 40 A feasibility study has been performed at the cost of $25 which has generated the following data The machine will have a useful life of 5 years, will cost $400 to purchase and install This cost will be depreciated over the life of the project to a book value of zero using diminishing value depreciation 41 42 43 The machine is expected to have a salvage value of $50, which will be received at the end of Year 5 The project will require an increase in Net working capital of $10, which will be also recouped at the end of Year 5. 44 45 46 The new machine will generate an increased revenue of $150 in the first year of operation $180 in the second and third year, and $140 in Year 4 and Year 5 Use of the new machine will require an extra wage payment of $35 per year, extra maintenance costs of 39 per year. ABC Financial Statements Instruction Cost of Capital Capital Budgeting Discounted Payback ROI NPV 14 Commentary Ready Insert Home Formulas Data Review View Page Layout Normal Bad Good Cut General Calibri 11 Wrap Text Calculation Check Cell Insert Copy Format Painter % Paste 8.08 Merge & Center U Conditional Format as Neutral Formatting Table Number Styles M Clipboard Font Alignment Security Warning Automatic update of links has been disabled Options. B5 It is now Feb 2019. ABC Ltd has identified few potential projects that the firm could undertake, but is not sure how to determine the best projects to go ahead with U w J K L M N E 3 Calculate the firm's WACC 14 The interest rate on Bank Loani 8.0% and interest rate on the Mortgage Loanis 110% Market value of Bank Loan and Mortgage Loan can be presumed to be the values in the 2018 Balance Sheet 15 16 72 18 19 The corporate bond issued by the firm is rated A+ and require 165bsp above the 5-year Government Securities rate of 3.5% This bond is paying 6% coupon on annual basis and have 10 years to maturity The ordinary shares have a beta of 14, the risk-free rate applies for the CAPM to identify cost of equity is the 10 year Government Securities rate of 54% Market Risk Premium is 4%. 20 21 22 The preference shares pay a fixed annual dividend of 10 cents per share 24 Alter identifying the WACC, the firm is considering about two projects. You will be in the position to recommend the acceptance or rejection of the project to your client The project in question involves the acquisition of a new machine which will help the firm to increase its productivity of children toys. The firm has analysed the project and provided the following information as shown below You need to complete the following tasks in Capital Budgeting tab. 26 27 28 29 30 31 33 33 44 1 Determine the incremental free cashflows if they would be accepted 2. Calculate the NPV of the incremental free cashflows. Provide the firm with your recommendation to accept or reject the project Following is the project's information (all values are in thousands of dollars) A feasibility study has been performed at the cost of $25. which has generated the following data 36 37 30 The machine will have a useful life of 5 years, will cost $400 to purchase and install 39 This cost will be depreciated over the life of the project to a book value of zero using diminishing value depreciation 40 41 42 The machine is expected to have a salvage value of $50, which will be received at the end of Year 5 The project will require an increase in Net working capital of $10, which will be also recouped at the end of Year 5. 43 44 45 46 42 The new machine will generale an increased revenue of $150 in the first year of operation, $180 in the second and third year, and $140 in Year 4 and Year 5 Use of the new machine will require an extra wage payment of $35 per year extra maintenance costs of $9 per year The machine will be installed in a building that has been already owned by the firm If the project does not go ahead, this building could be rented out for $15 per year 23 49 50 51 50 53 54 T U ASSIGNMENT 1: CAPITAL BUDGETING ABC LTD BALANCE SHEETS AS AT 31 DECEMBER ($000) 2015 2016 2017 2018 2015 2016 2017 2018 ASSETS Current Assets Cash Account Receivable Inventory Prepaid Expense Total Current Assets 515 106 212 22 855 115 220 18 775 WEWP LIABILITIES Current Liabilities Bank Overdraft Account Payable Income Tax Payable Dividend Payable Total Current Liabilities 458 113 179 17 767 186 15 801 23 104 97 229 453 24 105 73 146 348 2 25 106 70 129 329 24 107 65 130 326 Non-current Assets Land and Building Motor Vehicles less Depreciation Plant and Equipment less Depreciation Furniture, Fixtures and Fittings less Depreciation Total Non-current Assets MU5 1,310 160 1310 160 8 480 122) 150 (15) 2,055 1.310 160 124 571 169) 155 1,310 160 40) 599 (1251 160 35) 2029 (56) Non-current Liabilities Bank Loans Mortgage Loans Corporate Loans Total Non-current Liabilities 658 341 670 1,669 658 307 670 1.635 658 292 670 1620 658 260 670 1588 683 (185) 165 (45) 2.032 TOTAL LIABILITIES 2.122 1983 1949 1914 2 078 SHAREHOLDERS' EQUITY Ordinary Shares Preference Shares Retained Earnings Total Shareholders' Equity 502 502 175 111 788 175 193 870 502 175 204 881 502 175 208 895 TOTAL ASSETS 2,910 2.853 2,830 2.799 TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY 2.910 2.853 2.830 2799 ABC LTD PROFIT AND LOSS STATEMENTS FOR THE YEARS ENDING 31 DECEMBER ($000) ABC LTD STATEMENTS OF CASHFLOWS FOR THE YEARS ENDING 31 DECEMBER ($000) 2016 2017 2018 Sales Cost of Good Sold (Cost of Sales) Gross Profit Wages Pent + ABC Financial Statements 2016 2,191 (1.306) 885 (308) 1891 2017 2,100 (1,332) 768 (302) 1891 2018 2,376 (1371) 1,005 (399) 1891 CASHFLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash paid to suppliers Cash expenses linterest paid 2.166 (1045) (847) 2 293 (1000) 17471 2054 (890) 18271 69 2016 N P R U V D E M F G H 31 2.853 2.910 2.830 2.799 TOTAL ASSETS 2.910 2.853 2,830 2,799 TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY ABC LTD PROFIT AND LOSS STATEMENTS FOR THE YEARS ENDING 31 DECEMBER ($000) ABC LTD STATEMENTS OF CASHFLOWS FOR THE YEARS ENDING 31 DECEMBER ($000) 88982 2016 2017 2018 2017 2.100 (1.332) 768 (302) 2.054 2293 (1000) 747) 105) (89) Sales Cost of Good Sold Cost of Sales Gross Profit Wages Pent Motoveracle running expenses Heating and Lighting Telephone: postage and Internet Depreciation Total Operating Expenses Operating Profit (EBIT) Interest Profit Before Tax Taz (3074 Net Profit 2016 2.191 (1306) 885 (308) (89) (35 (28) ( (73) 579) 306 73) 233 (70) 163 2 166 (1045) (847) (108) (87) (18) 67 (827 1103 1361 17) 187 2018 2.376 (1371) 1,005 (399) (89) (39) (26) (41) (86) 1680) 325 (70) 255 (77) 179 (15) 356 8 46 w www 28 25 (42) (82) (577) 191 (71 120 (36) 84 124 CASHFLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash paid to suppliers Cash expenses Interest paid Tax paid Prepaid expenses Net cash provided by operating activities CASHFLOWS FROM INVESTING ACTIVITIES Plant and Equipment Furniture, Fixtures and Fittings Net cash provided by investing activities CASHFLOWS FROM FINANCING ACTIVITIES Bank Overdraft Mortgage Loan Repayments Buyback of Shares Dividend Paid Net cash provided by financing activities Net increase in cash + Opening Cash - Closing Cash (44) 5 (39) 33 19 (371 858 E3. $8 134) 5 , 8 Ordinary Dividend Pad Preference Dividerd Pad Dividend Pad 85 20 105 84 20 104 90 20 110 (83) (121) 1931 515 422 1851 120) 269 422 490 (84) (175) 46 480 458 Purchases 1029 1173 1036 Ordinary Share price ($) Number of Ordinary Share thousand) 2.05 245 210 245 232 245 Preference Share price ($) Number of Preference Share thousand) 136 All purchases and sales are on credit 132 195 145 155 Formatting Table Clipboard Font Alignment Number Styles Security Warning Automatic update of links has been disabled Options... A B D F 5 6 7 8 9 B5 f It is now Feb 2019. ABC Ltd has identified few potential projects that the firm could undertake, but is not sure how to determine the best projects to go ahead G 'M N U It is now Feb 2019 ABC Lid has identified few potential projects that the firm could undertake but is not sure how to determine the best projects to go ahead with You have explained to your client that the first task to do is to figure out the firm's Weighted w Average Cost of Capital (WACC), as it is the minimum return required on new projects in order to meet the cost of capital and increase the value of the firm Based on the most recent financial data in 2018 which has been provided in Assignment 2 you will help the firm to calculate its WACC based on the sources of capital shown in the 2018 Balance Sheet 10 11 12 13 You need to complete the following tasks in Cost of Capital tab. DIE 1 Determine the cost of all sources of capital cite all non-current liabilities ordinary shares, preference shares) - Note that Retained Earnings are not included, since all reserves, including retained earrings. belong to the owners of ordinary shares, and market value of ordinary shares has included the value of these reserves) 2 Determine the market value of all sources of capital (excluding Retained Earrings) 3. Calculate the firm's WACC 14 15 16 17 18 The interest rate on Bank Loan is 8.0% and interest rate on the Mortgage Coanis 110 DOBU Market value of Bank Loan and Mortgage Loan can be presumed to be the values in the 2018 Balance Sheet The corporate bond issued by the firm is rated A+ and require 165bsp above the 5-year Government Securities rate of 35% This bond is paying 6% coupon on annual basis and have 10 years to maturity CU HE The ordinary shares have a bela of 14 the risk-free rate applies for the CAPM to identify cost of equity is the 10-year Government Securities rate of 5 4% Market Risk Premium is 4% 20 21 22 24 The preference shares pay a fixed annual dividend of 10 cents per share EN 2011 After identifying the WACO the firmis considering about two projects. You will be in the position to recommend the acceptance or rejection of the project to your client EVE The project in question involves the acquisition of a new machine which will help the firm to increase its productivity of children toys. The firm has analysed the project and provided the following information as shown below. 28 You need to complete the following tasks in Capital Budgeting tab 1 Determine the incremental free cashflows if they would be accepted 2 Calculate the NPV of the incremental free cashflows. 3. Provide the firm with your recommendation to accept or reject the project Following is the project's information (all values are in thousands of dollars) 30 31 32 33 34 35 36 37 38 39 40 A feasibility study has been performed at the cost of $25 which has generated the following data The machine will have a useful life of 5 years, will cost $400 to purchase and install This cost will be depreciated over the life of the project to a book value of zero using diminishing value depreciation 41 42 43 The machine is expected to have a salvage value of $50, which will be received at the end of Year 5 The project will require an increase in Net working capital of $10, which will be also recouped at the end of Year 5. 44 45 46 The new machine will generate an increased revenue of $150 in the first year of operation $180 in the second and third year, and $140 in Year 4 and Year 5 Use of the new machine will require an extra wage payment of $35 per year, extra maintenance costs of 39 per year. ABC Financial Statements Instruction Cost of Capital Capital Budgeting Discounted Payback ROI NPV 14 Commentary Ready Insert Home Formulas Data Review View Page Layout Normal Bad Good Cut General Calibri 11 Wrap Text Calculation Check Cell Insert Copy Format Painter % Paste 8.08 Merge & Center U Conditional Format as Neutral Formatting Table Number Styles M Clipboard Font Alignment Security Warning Automatic update of links has been disabled Options. B5 It is now Feb 2019. ABC Ltd has identified few potential projects that the firm could undertake, but is not sure how to determine the best projects to go ahead with U w J K L M N E 3 Calculate the firm's WACC 14 The interest rate on Bank Loani 8.0% and interest rate on the Mortgage Loanis 110% Market value of Bank Loan and Mortgage Loan can be presumed to be the values in the 2018 Balance Sheet 15 16 72 18 19 The corporate bond issued by the firm is rated A+ and require 165bsp above the 5-year Government Securities rate of 3.5% This bond is paying 6% coupon on annual basis and have 10 years to maturity The ordinary shares have a beta of 14, the risk-free rate applies for the CAPM to identify cost of equity is the 10 year Government Securities rate of 54% Market Risk Premium is 4%. 20 21 22 The preference shares pay a fixed annual dividend of 10 cents per share 24 Alter identifying the WACC, the firm is considering about two projects. You will be in the position to recommend the acceptance or rejection of the project to your client The project in question involves the acquisition of a new machine which will help the firm to increase its productivity of children toys. The firm has analysed the project and provided the following information as shown below You need to complete the following tasks in Capital Budgeting tab. 26 27 28 29 30 31 33 33 44 1 Determine the incremental free cashflows if they would be accepted 2. Calculate the NPV of the incremental free cashflows. Provide the firm with your recommendation to accept or reject the project Following is the project's information (all values are in thousands of dollars) A feasibility study has been performed at the cost of $25. which has generated the following data 36 37 30 The machine will have a useful life of 5 years, will cost $400 to purchase and install 39 This cost will be depreciated over the life of the project to a book value of zero using diminishing value depreciation 40 41 42 The machine is expected to have a salvage value of $50, which will be received at the end of Year 5 The project will require an increase in Net working capital of $10, which will be also recouped at the end of Year 5. 43 44 45 46 42 The new machine will generale an increased revenue of $150 in the first year of operation, $180 in the second and third year, and $140 in Year 4 and Year 5 Use of the new machine will require an extra wage payment of $35 per year extra maintenance costs of $9 per year The machine will be installed in a building that has been already owned by the firm If the project does not go ahead, this building could be rented out for $15 per year 23 49 50 51 50 53 54