Question 1 Beta Limited ("Beta") is a large company which is listed on HK stock market. The company has been evaluating an investment proposal to manufacture Product K3J. The below is the investment proposal information for evaluation. Expected Operating Cash Inflows Before Tax at the ended of Dec 30, each year are below. Year $'000 2021 3,950 2022 4,520 2023 5,280 2024 6,340 A new machine for the project will be purchased at a cost of $2.5 million for the initial set up. Capital allowances for tax purpose are available on the initial investment in machinery on a straight line basis with a scrap value of $300,000 Initial investment of working capital of $100,000 would be recovered half of the amount at the end of the project. Corporate tax rate is 20% which it is payable one year in arrears. Beta plans to use the weighted Average Cost of Capital (WACC) to evaluate the project. The financial information of the company as at 1 January 2021 is as follows: Ordinary shares, each $2.00 Reserves 8% preference shares, each $0.50 6% annual coupon bonds due in 5 years, each $1,000 $'000 35,000 12,000 10,000 22,000 The current share price of Beta is traded at $10.50. The company has also recently paid out a dividend of $1.02 in Dec 2020. Historical dividend paid record is as below. $1.02 2020 2019 2018 2017 2016 0.90 0.85 0.80 0.75 Other sources of finance are preference shares and coupon bonds. The preference shares have a price of $0.80 while the bonds are trade at $1,020. Required: Note that you are required to show ALL workings clearly in your answer derived. Marks will be given. a. Calculate Beta's Weighted Average Cost of Capital WACC (round off to integer in percent). (28 marks) b. Compute the Net Present Value (NPV) of the 4-year project. (36 marks) C. Determine by how much change in percentage would the NPV changed to be negative for: i. Initial machine cost ii. Operating cash flows before tax Comment on the result. (16 marks) d. Marketing director would like to use internal rate of return for evaluation. Advise if it can come to the same conclusion. (20 marks) (Total 100 marks) Question 1 Beta Limited ("Beta") is a large company which is listed on HK stock market. The company has been evaluating an investment proposal to manufacture Product K3J. The below is the investment proposal information for evaluation. Expected Operating Cash Inflows Before Tax at the ended of Dec 30, each year are below. Year $'000 2021 3,950 2022 4,520 2023 5,280 2024 6,340 A new machine for the project will be purchased at a cost of $2.5 million for the initial set up. Capital allowances for tax purpose are available on the initial investment in machinery on a straight line basis with a scrap value of $300,000 Initial investment of working capital of $100,000 would be recovered half of the amount at the end of the project. Corporate tax rate is 20% which it is payable one year in arrears. Beta plans to use the weighted Average Cost of Capital (WACC) to evaluate the project. The financial information of the company as at 1 January 2021 is as follows: Ordinary shares, each $2.00 Reserves 8% preference shares, each $0.50 6% annual coupon bonds due in 5 years, each $1,000 $'000 35,000 12,000 10,000 22,000 The current share price of Beta is traded at $10.50. The company has also recently paid out a dividend of $1.02 in Dec 2020. Historical dividend paid record is as below. $1.02 2020 2019 2018 2017 2016 0.90 0.85 0.80 0.75 Other sources of finance are preference shares and coupon bonds. The preference shares have a price of $0.80 while the bonds are trade at $1,020. Required: Note that you are required to show ALL workings clearly in your answer derived. Marks will be given. a. Calculate Beta's Weighted Average Cost of Capital WACC (round off to integer in percent). (28 marks) b. Compute the Net Present Value (NPV) of the 4-year project. (36 marks) C. Determine by how much change in percentage would the NPV changed to be negative for: i. Initial machine cost ii. Operating cash flows before tax Comment on the result. (16 marks) d. Marketing director would like to use internal rate of return for evaluation. Advise if it can come to the same conclusion. (20 marks) (Total 100 marks)
