Question 1 a. Consider the following two mutually exclusive projects: Year Cash Flow (Project 1) Cash Flow (Project B) -540000 20000 19000 50000 12000 50000 18000 390000 10500 Whichever project you choose, if any, you require a 15 percent return on your investment. (i) If you apply the payback criterion (in fractional year), which investment will you choose? Why? (2 marks) (ii) If you apply the discounted payback criterion (in fractional year), which investment will you choose? Why? marks) (iii) If you apply the NPV criterion, which investment will you choose? Why? (2 marks) (iv) If you apply the profitability index criterion, which investment will you choose? Why? (2 (v) Based on your answers in () though (iv), which project will you finally choose? Why? b. Happy Boards is contemplating the purchase of a new computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth a positive salvage value at the end of that time. Details are summarized as follows:- Items Value New computer-based order entry system $1,200,000 Depreciation Method Straight Line Method Expected economic life 6 years Salvage Value $125,000 Note: The system requires an initial investment in net working capital of $35,000. The company will then save $550,000 before taxes per year in order processing costs. If the tax rate is 35 percent and the required return on this project is 18 percent, would the company accept the project by using the net present value (NPV) analysis? Show your workings. (15 marks) Question 2 Super Growth Co. is growing rapidly. You are employed as a financial analyst of the company. You have devised the details of the company current and future dividend value as well as the growth rate as summarized in Table 2 Table 2 Dividend Growth Rake Predicti e for the next year 32% per year thereafter willing to com p er A required Dividend paid One day, the CEO of the company comes to your office and asks you the following questions: " What determine the stock price? Is it dividend? What else should we consider? I notice that there are some companies like Tencent, that pays very small amount of dividend per share to shareholders could have very good rise in their stock prices. Does it mean that the dividend growth model is not useful in stock valuation? "Besides, our company has become a listed firm in Hong Kong for three years. Should the company still concem its current stock price? Why?", said the CEO. Required: a. Based on the information of Table 2, what is the current share price according to dividend growth model? Show your workings. (13 marks) b. Regarding the questions of the CEO, explain your points to CEO (limit your answer to 450 words). a. Carrington Company is interested in bond investment. The company has identified three bonds with 8% coupon rates, all selling at face value of S1000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. i) What is the percentage change in the price of each bond if their yields increase to 9%? (5 marks) ii) What is the percentage change in the price of each bond if their yields decrease to 7%? (5 marks) iii) Illustrate your answers by graph. What does the answers to (i) and (in) tell you about the relationship between time to maturity and the sensitivity of bond prices to interest rates? (3 marks) Show your workings. (13 marks) b. The CEO of Carrington Company is considering a five- year investment project of setting up a production factory in Shezhen of China for manufacturing 5G (5th Generation) mobile phones. You are a financial manager of the company. Under the current situation of China, explain to the CEO the major considerations and problems associated in the estimation of cashflow of this project. The CEO knows that there are (Internal Rate of Retum) IRR and (Net Present Value) NPV methods to evaluate the project. When would it be better to use IRR rather than NPV method to examine the acceptability of the project in this case? The CEO also asks if it is possible to have a positive initial cash flow at the beginning of the project. Explain whether it is possible or not and illustrate your explanation with example(s). (limit your answer to 450 words) Question 4 a. Consider the followingsbocisted financial statements Question 4 a. Consider the following abbreviated financial statements for Power Enterprises: Power Berries 2018 and 2010 Partial Balance Sheets Liabilities and Owners' Equity 2019 2018 2019 4293 Current S4535707 Current Liabilities Net Fixed 2013340 Long-Tom Powers Star SK20 Costs Depreciation Interest Paid 211 (i) What is owners' equity for 2018 and 2019? (3 marks) (ii) What is the change in net working capital for 2019? (3 marks) (iii) In 2019, Power Enterprises purchased $1350 in new fixed assets. How much in fixed assets did Power Enterprises sell? What is the cash flow from assets for the year? (The tax rate is 35 percent.) (3 marks) (iv) During 2019, Power Enterprises raised S420 in new long-term debt. How much long term debt must Power Enterprises have paid off during the year? What is the cash flow to creditors? (4 marks) Show your workings. (13 marks) b. Samuel company, a toy retailer, is publicly listed in Hong Kong. The company is thinking of investing in natural gas wells in Russia. This would be a five-year project. The CEO of the company has employed you as a financial manager for this investment project. Explain to the CEO the major considerations, methods and challenges in determining the required rate of return for this project. Explain if there would be any difference in the estimation of required rate of return for a private firm or a publicly traded firm. Explain also whether it is important to consider the issue of operating leverage in analysing this project. The CEO says The cost of capital depends on the source of the money, not the risk of the project." Do you agree? Explain with example. (limit your answer to 450 words) (12 marks)