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Q4(b) (6 marks) A U.K. company is deciding between two mutually exclusive projects with the following costs and expected net cash flows: Year Project 1
Q4(b) | (6 marks) | |||||||||||
A U.K. company is deciding between two mutually exclusive projects with the following costs and expected net cash flows: | ||||||||||||
Year | Project 1 | Project 2 | ||||||||||
0 | 8,000,000 | 8,000,000 | ||||||||||
1 | 5,340,000 | 5,740,000 | ||||||||||
2 | 3,835,000 | 3,835,000 | ||||||||||
3 | 5,590,000 | 1,595,000 | ||||||||||
The company uses a discount rate of 8% for all projects and accepts all projects with a payback period of less than 5 years. | ||||||||||||
Which project is acceptable based on NPV (expressed in ) and based on payback period? Which choice is aligned to the goal of maximising shareholders' wealth? |
Q6(b) | (6 marks) |
A company issues a $280 million IPO. The offer price is set to $10 per share. The underwriters spread is 8%. | |
The underwriter has agreed to a best-effort arrangement. | |
For issuing the IPO, the company will pay some admin costs. The admin costs include a legal fee of $50,000, an accountant fee of $35,000 and other admin costs amounting to $85,000. The companys share price increases by 5% at the end of the first day of trading. | |
i. Determine the companys total cost of issuing the securities.. | (2 marks) |
ii. Determine proceeds available to the underwriter and to the issuer if 92% of the shares are sold. | (1 mark) |
iii. Who bears more risk under the current arrangement? The underwriter or the issuer? Why? | (1 mark) |
iv. How will the proceeds available to the issuer and to the underwriter change for a stand-by arrangement? note: if you find any incomplete question, just use your assumptions.
| (2 marks) |
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