Question Four Answer all parts IT Solutions Ple is listed on the London Stock Exchange. It operates in two distinct sectors, its IT Infrastructure Division (LID) develops hardware and software systems for public sector clients and its Consumer Division (CD) develops hardware and software products for consumers. It is considering bidding for a contract to develop a new health information system for the UK Government. However, initial analysis indicates that the IRR of this project would be below the company's WACC. The Managing Director of the IID argues that this WACC is not appropriate for projects in her Division as they are less risky, on average, than the firm as a whole. The CEO of IT Solutions is unconvinced and argues that the Managing Director is trying to make the project appear more attractive than it actually is. The IID and the CD account for approximately 35% and 65% of company profits respectively. Estimates of IT Solutions's beta are 1.4 (estimated over 60 days), 1.1 (estimated over 2 year) and 1.5 (estimated over 60 months). IT Solutions has a target Debt to Value ratio of 0.6L. Estimates of the Equity Risk Premium are 70% (estimated over 1 year), 6% (estimated over 10 years) and 5.50% (estimated over 75 years). The marginal corporation tax rate is 35%. UC's debt comprises traded bonds, with a par value of 1,000 and 10 years remaining to maturity, which pay a semi-annual coupon (annual coupon of 6%) and are trading at 1,065 today. The following information is also available to you. UK Listed Companies in the IT sector. Company Beta Debt/Value of Profit Generated in Consumer IT sector Compu Compu Compu 1.7 0.9 0.3 0.5 0.2 9196 55% 939 Government Bond Yields 1 Year Yield to Maturity 0.50% 2 Year 30 Year 5 Year 1 2015 0.7596 LOS Required (1) Estimme a Weighted Average Cost of Capital appropriate for the analysis being conducted by the IT Infrastructure Division. Briefly explain and comment on each choice you make about which inputs you use (25 Marks) Critically assess the arguments of the CEO and the Managing Director in relation to the appropriate discount rate for this project. (10 Marks) (Total 35 Marks) (1) Question Four Answer all parts IT Solutions Plc. is listed on the London Stock Exchange. It operates in two distinct sectors, its IT Infrastructure Division (TID) develops hardware and software systems for public sector clients and its Consumer Division (CD) develops hardware and software products for consumers. It is considering bidding for a contract to develop a new health information system for the UK Government. However, initial analysis indicates that the IRR of this project would be below the company's WACC. The Managing Director of the IID argues that this WACC is not appropriate for projects in her Division as they are less risky, on average, than the firm as a whole. The CEO of IT Solutions is unconvinced and argues that the Managing Director is trying to make the project appear more attractive than it actually is. The IID and the CD account for approximately 35% and 65% of company profits respectively. Estimates of IT Solutions's beta are 1.4 (estimated over 60 days), 1.1 (estimated over 2 year) and 1.5 (estimated over 60 months). IT Solutions has a target Debt to Value ratio of 0.6/1. Estimates of the Equity Risk Premium are 7.0% (estimated over 1 year), 6% (estimated over 10 years) and 5.50% (estimated over 75 years). The marginal corporation tax rate is 35%. UC's debt comprises traded bonds, with a par value of 1,000 and 10 years remaining to maturity, which pay a semi-annual coupon (annual coupon of 6%) and are trading at 1,065 today. The following information is also available to you. UK Listed Companies in the IT sector. Company Beta Debt/Value% of Profit Generated in Consumer IT sector Compe ALL 0.2 Compe B12 0.5 CompuC09 0.2 59% 99% Government Bond Yields 1 Year 2 Year 5 Year 30 Year Vield to Maturity 0.50% 0.75% 1.2% 1.80% Previous Next Required: (1) (25 (ii) Estimate a Weighted Average Cost of Capital appropriate for the analysis being conducted by the IT Infrastructure Division. Briefly explain and comment on each choice you make about which inputs you use. Marks) Critically assess the arguments of the CEO and the Managing Director in relation to the appropriate discount rate for this project. (10 Marks) (Total 35 Marks) Standard Normal Cumulative Probability Table Cumulative probabilities for NEGATIVE rehow the following 34 0000000000000000000000000 33 0.0005 0.0005 0.0005 0.0004 0.0004 0.0004 0.0004 0.0004 0.0004 0.0000 3) 0.0007 0.000 0.000 0.00000000000000000000006000000000 2.1 0.00100000000000000000000000000000000000OOOOOO 0.0013000100010001200012 000 0001100011 00010000 -23 0.001 0.0011 0.0000017 00010 0.0016 0.01 0.00150.00 21 0.0020 00025 00094 00023 00023 0002 0.0001 0.0003 0.0000 0035 0.0034 00033 0.0032 00031 0.0030 0.00 0.000000 26 0.001700045 00044 00043 000400040 0.0039 00030 0.0037 000 DO20000000000 DOSY 0005 00014 24 0.0012 000 00 00075 000 0 0 0000 0000 000 000 23 0.010700104 0.010 0.00900.000 0004 0.000 0.000000 0.0054 0013000130001320012000125 0012200110011000113 0110 4. 017000114 0017000166 000 001500156 001000 002200022200011 00212 000 000 000 0.0087 0.000100074 0.00 00 0.00 0.00 0.00 0.000023 0.0050 000 0.054400330 0092900322 0014009070030000294 0044004360042200418 000 000 000 006 0.0075 00841005100826 000 0080500307505 -1.5 0.000100656 0.06433000018 0.000000000 -14 00000073 DOT 00764 014900736007240700 13 0.0068 0005 0094 0.0010 0.00 0.00 0.00 0.000000 -12 01151 0.1131 011201009 0.10790056 0101010000100 0.157 0.155501314 0 120 00 0.125 0.250 0.20 0.7180 0.1587015201598 0.15150201200401401 0.101 01654 0178 0172 11 4 2010 0.2001 02033 2005 0977 1948 0224 200 025900 285802327 02256 0220032002200020703548 16 0.743 0.709 0.20700284302011 02578 254602514043035 3085 0.305002015020102846 021120200230 0.250 4.4 0.400.40003372 0.3396 0.3300 0.3264 0.3228 0.003196001 -3 03801 03743 0314 0.3709 00 03 00.000 -02 0:430704160 04720 0.400004052 0.0013 0907 100 000 4. 0.460204562 0.4522 0483 0443 444 44 00 0.500004960 04020 04850 04540 0470 0-1721 D 07 Standard Normal Cumulative Probability Table Cumulative probabilities for POSITIVE 2-values are shown in the following table: z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.0 0.5000 0.5040 0.5080 0.5120 0.5160 0.5199 0.5239 0.1 0.5398 0.5438 0.5478 0.5517 0.5557 0.5596 0.5636 0.2 0.5793 0.5832 0.5871 0.5910 0.5948 0.5987 0.6026 0.3 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.4 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.07 0.5279 0.5675 0.6064 0.6443 0.6808 0.08 0.5319 0.5714 0.6103 0.6480 0.6844 0.09 0.5359 0.5753 0.6141 0.6517 0.6879 0.5 0.6 0.7 0.8 0.9 29 0.6915 0.7257 0.7580 0.7881 0.8159 0.6950 0.7291 0.7611 0.7910 0.8186 0.6985 0.7324 0.7642 0.7939 0.8212 0.7019 0.7357 0.7673 0.7967 0.8238 0.7054 0.7389 0.7704 0.7995 0.8264 0.7088 0.7422 0.7734 0.8023 0.8289 0.7123 0.7454 0.7764 0.8051 0.8315 0.7157 0.7486 0.7794 0.8078 0.8340 0.7190 0.7517 0.7823 0.8106 0.8365 0.7224 0.7549 0.7852 0.8133 0.8389 2 1.0 1.1 1.2 1.3 1.4 0.8413 0.8643 0.8849 0.9032 0.9192 0.8438 0.8665 0.8869 0.9049 0.9207 0.8461 0.8686 0.8888 0.9066 0.9222 0.8485 0.8708 0.8907 0.9082 0.9236 0.8508 0.8729 0.8925 0.9099 0.9251 0.8531 0.8749 0.8944 0.9115 0.9265 0.8554 0.8770 0.8962 0.9131 0.9279 0.8577 0.8790 0.8980 0.9147 0.9292 0.8599 0.8810 0.8997 0.9162 0.9306 0.8621 0.8830 0.9015 0.9177 0.9319 1.5 1.6 1.7 1.8 1.9 20 0.9332 0.9452 0.9554 0.9641 0.9713 0.9345 0.9463 0.9564 0.9649 0.9719 0.9357 0.9474 0.9573 0.9656 0.9726 0.9370 0.9484 0.9582 0.9664 0.9732 0.9382 0.9495 0.9591 0.9671 0.9738 0.9394 0.9505 0.9599 0.9678 0.9744 0.9406 0.9515 0.9608 0.9686 0.9750 0.9418 0.9525 0.9616 0.9693 0.9756 0.9429 0.9535 0.9625 0.9699 0.9761 0.9441 0.9545 0.9633 0.9706 0.9767 NNN 2.0 2.1 2.2 2.3 2.4 NO 0.9772 0.9821 0.9861 0.9893 0.9918 0.9778 0.9826 0.9864 0.9896 0.9920 0.9783 0.9830 0.9868 0.9898 0.9922 0.9788 0.9834 0.9871 0.9901 0.9925 0.9793 0.9838 0.9875 0.9904 0.9927 0.9798 0.9842 0.9878 0.9906 0.9929 0.9803 0.9846 0.9881 0.9909 0.9931 0.9808 0.9850 0.9884 0.9911 0.9932 0.9812 0.9854 0.9887 0.9913 0.9934 0.9817 0.9857 0.9890 0.9916 0.9936 2.5 2.6 2.7 2.8 2.9 0.9938 0.9953 0.9965 0.9974 09981 0.9940 0.9955 0.9966 0.9975 0.9982 0.9941 0.9956 0.9967 0.9976 0.9982 0.9943 0 9957 0.9968 0.9977 0.9983 0.9945 0.9959 0.9969 0.9977 0.9984 0.9946 0.9960 0.9970 09978 0.9984 0.9948 0.9961 0.9971 0.9979 0.9985 0.9949 0.9962 09972 0.9979 0.9985 0.9951 0.9963 0.9973 0.9980 0.9986 0.9952 09964 0.9974 0.9981 0.9986 3.0 3.1 3.2 3.3 3.4 0.9987 0.9990 0.9993 0.9995 0.9997 0.9987 0.9991 0.9993 0.9995 0.9997 0.9987 0.9991 0.9994 0.9995 0.9997 0.9988 0.9991 0.9994 0.9996 0.9997 0.9988 0.9992 0.9994 0.9996 0.9997 09989 0.9992 0.9994 0.9996 0.9997 0.9989 0.9992 0.9994 0.9996 0.9997 0.9989 0.9992 0.9995 0.9996 0.9997 0.9990 0.9993 0.9995 0.9996 0.9997 0.9990 0.9993 0.9995 0.9997 0.9998 Question Four Answer all parts IT Solutions Ple is listed on the London Stock Exchange. It operates in two distinct sectors, its IT Infrastructure Division (LID) develops hardware and software systems for public sector clients and its Consumer Division (CD) develops hardware and software products for consumers. It is considering bidding for a contract to develop a new health information system for the UK Government. However, initial analysis indicates that the IRR of this project would be below the company's WACC. The Managing Director of the IID argues that this WACC is not appropriate for projects in her Division as they are less risky, on average, than the firm as a whole. The CEO of IT Solutions is unconvinced and argues that the Managing Director is trying to make the project appear more attractive than it actually is. The IID and the CD account for approximately 35% and 65% of company profits respectively. Estimates of IT Solutions's beta are 1.4 (estimated over 60 days), 1.1 (estimated over 2 year) and 1.5 (estimated over 60 months). IT Solutions has a target Debt to Value ratio of 0.6L. Estimates of the Equity Risk Premium are 70% (estimated over 1 year), 6% (estimated over 10 years) and 5.50% (estimated over 75 years). The marginal corporation tax rate is 35%. UC's debt comprises traded bonds, with a par value of 1,000 and 10 years remaining to maturity, which pay a semi-annual coupon (annual coupon of 6%) and are trading at 1,065 today. The following information is also available to you. UK Listed Companies in the IT sector. Company Beta Debt/Value of Profit Generated in Consumer IT sector Compu Compu Compu 1.7 0.9 0.3 0.5 0.2 9196 55% 939 Government Bond Yields 1 Year Yield to Maturity 0.50% 2 Year 30 Year 5 Year 1 2015 0.7596 LOS Required (1) Estimme a Weighted Average Cost of Capital appropriate for the analysis being conducted by the IT Infrastructure Division. Briefly explain and comment on each choice you make about which inputs you use (25 Marks) Critically assess the arguments of the CEO and the Managing Director in relation to the appropriate discount rate for this project. (10 Marks) (Total 35 Marks) (1) Question Four Answer all parts IT Solutions Plc. is listed on the London Stock Exchange. It operates in two distinct sectors, its IT Infrastructure Division (TID) develops hardware and software systems for public sector clients and its Consumer Division (CD) develops hardware and software products for consumers. It is considering bidding for a contract to develop a new health information system for the UK Government. However, initial analysis indicates that the IRR of this project would be below the company's WACC. The Managing Director of the IID argues that this WACC is not appropriate for projects in her Division as they are less risky, on average, than the firm as a whole. The CEO of IT Solutions is unconvinced and argues that the Managing Director is trying to make the project appear more attractive than it actually is. The IID and the CD account for approximately 35% and 65% of company profits respectively. Estimates of IT Solutions's beta are 1.4 (estimated over 60 days), 1.1 (estimated over 2 year) and 1.5 (estimated over 60 months). IT Solutions has a target Debt to Value ratio of 0.6/1. Estimates of the Equity Risk Premium are 7.0% (estimated over 1 year), 6% (estimated over 10 years) and 5.50% (estimated over 75 years). The marginal corporation tax rate is 35%. UC's debt comprises traded bonds, with a par value of 1,000 and 10 years remaining to maturity, which pay a semi-annual coupon (annual coupon of 6%) and are trading at 1,065 today. The following information is also available to you. UK Listed Companies in the IT sector. Company Beta Debt/Value% of Profit Generated in Consumer IT sector Compe ALL 0.2 Compe B12 0.5 CompuC09 0.2 59% 99% Government Bond Yields 1 Year 2 Year 5 Year 30 Year Vield to Maturity 0.50% 0.75% 1.2% 1.80% Previous Next Required: (1) (25 (ii) Estimate a Weighted Average Cost of Capital appropriate for the analysis being conducted by the IT Infrastructure Division. Briefly explain and comment on each choice you make about which inputs you use. Marks) Critically assess the arguments of the CEO and the Managing Director in relation to the appropriate discount rate for this project. (10 Marks) (Total 35 Marks) Standard Normal Cumulative Probability Table Cumulative probabilities for NEGATIVE rehow the following 34 0000000000000000000000000 33 0.0005 0.0005 0.0005 0.0004 0.0004 0.0004 0.0004 0.0004 0.0004 0.0000 3) 0.0007 0.000 0.000 0.00000000000000000000006000000000 2.1 0.00100000000000000000000000000000000000OOOOOO 0.0013000100010001200012 000 0001100011 00010000 -23 0.001 0.0011 0.0000017 00010 0.0016 0.01 0.00150.00 21 0.0020 00025 00094 00023 00023 0002 0.0001 0.0003 0.0000 0035 0.0034 00033 0.0032 00031 0.0030 0.00 0.000000 26 0.001700045 00044 00043 000400040 0.0039 00030 0.0037 000 DO20000000000 DOSY 0005 00014 24 0.0012 000 00 00075 000 0 0 0000 0000 000 000 23 0.010700104 0.010 0.00900.000 0004 0.000 0.000000 0.0054 0013000130001320012000125 0012200110011000113 0110 4. 017000114 0017000166 000 001500156 001000 002200022200011 00212 000 000 000 0.0087 0.000100074 0.00 00 0.00 0.00 0.00 0.000023 0.0050 000 0.054400330 0092900322 0014009070030000294 0044004360042200418 000 000 000 006 0.0075 00841005100826 000 0080500307505 -1.5 0.000100656 0.06433000018 0.000000000 -14 00000073 DOT 00764 014900736007240700 13 0.0068 0005 0094 0.0010 0.00 0.00 0.00 0.000000 -12 01151 0.1131 011201009 0.10790056 0101010000100 0.157 0.155501314 0 120 00 0.125 0.250 0.20 0.7180 0.1587015201598 0.15150201200401401 0.101 01654 0178 0172 11 4 2010 0.2001 02033 2005 0977 1948 0224 200 025900 285802327 02256 0220032002200020703548 16 0.743 0.709 0.20700284302011 02578 254602514043035 3085 0.305002015020102846 021120200230 0.250 4.4 0.400.40003372 0.3396 0.3300 0.3264 0.3228 0.003196001 -3 03801 03743 0314 0.3709 00 03 00.000 -02 0:430704160 04720 0.400004052 0.0013 0907 100 000 4. 0.460204562 0.4522 0483 0443 444 44 00 0.500004960 04020 04850 04540 0470 0-1721 D 07 Standard Normal Cumulative Probability Table Cumulative probabilities for POSITIVE 2-values are shown in the following table: z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.0 0.5000 0.5040 0.5080 0.5120 0.5160 0.5199 0.5239 0.1 0.5398 0.5438 0.5478 0.5517 0.5557 0.5596 0.5636 0.2 0.5793 0.5832 0.5871 0.5910 0.5948 0.5987 0.6026 0.3 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.4 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.07 0.5279 0.5675 0.6064 0.6443 0.6808 0.08 0.5319 0.5714 0.6103 0.6480 0.6844 0.09 0.5359 0.5753 0.6141 0.6517 0.6879 0.5 0.6 0.7 0.8 0.9 29 0.6915 0.7257 0.7580 0.7881 0.8159 0.6950 0.7291 0.7611 0.7910 0.8186 0.6985 0.7324 0.7642 0.7939 0.8212 0.7019 0.7357 0.7673 0.7967 0.8238 0.7054 0.7389 0.7704 0.7995 0.8264 0.7088 0.7422 0.7734 0.8023 0.8289 0.7123 0.7454 0.7764 0.8051 0.8315 0.7157 0.7486 0.7794 0.8078 0.8340 0.7190 0.7517 0.7823 0.8106 0.8365 0.7224 0.7549 0.7852 0.8133 0.8389 2 1.0 1.1 1.2 1.3 1.4 0.8413 0.8643 0.8849 0.9032 0.9192 0.8438 0.8665 0.8869 0.9049 0.9207 0.8461 0.8686 0.8888 0.9066 0.9222 0.8485 0.8708 0.8907 0.9082 0.9236 0.8508 0.8729 0.8925 0.9099 0.9251 0.8531 0.8749 0.8944 0.9115 0.9265 0.8554 0.8770 0.8962 0.9131 0.9279 0.8577 0.8790 0.8980 0.9147 0.9292 0.8599 0.8810 0.8997 0.9162 0.9306 0.8621 0.8830 0.9015 0.9177 0.9319 1.5 1.6 1.7 1.8 1.9 20 0.9332 0.9452 0.9554 0.9641 0.9713 0.9345 0.9463 0.9564 0.9649 0.9719 0.9357 0.9474 0.9573 0.9656 0.9726 0.9370 0.9484 0.9582 0.9664 0.9732 0.9382 0.9495 0.9591 0.9671 0.9738 0.9394 0.9505 0.9599 0.9678 0.9744 0.9406 0.9515 0.9608 0.9686 0.9750 0.9418 0.9525 0.9616 0.9693 0.9756 0.9429 0.9535 0.9625 0.9699 0.9761 0.9441 0.9545 0.9633 0.9706 0.9767 NNN 2.0 2.1 2.2 2.3 2.4 NO 0.9772 0.9821 0.9861 0.9893 0.9918 0.9778 0.9826 0.9864 0.9896 0.9920 0.9783 0.9830 0.9868 0.9898 0.9922 0.9788 0.9834 0.9871 0.9901 0.9925 0.9793 0.9838 0.9875 0.9904 0.9927 0.9798 0.9842 0.9878 0.9906 0.9929 0.9803 0.9846 0.9881 0.9909 0.9931 0.9808 0.9850 0.9884 0.9911 0.9932 0.9812 0.9854 0.9887 0.9913 0.9934 0.9817 0.9857 0.9890 0.9916 0.9936 2.5 2.6 2.7 2.8 2.9 0.9938 0.9953 0.9965 0.9974 09981 0.9940 0.9955 0.9966 0.9975 0.9982 0.9941 0.9956 0.9967 0.9976 0.9982 0.9943 0 9957 0.9968 0.9977 0.9983 0.9945 0.9959 0.9969 0.9977 0.9984 0.9946 0.9960 0.9970 09978 0.9984 0.9948 0.9961 0.9971 0.9979 0.9985 0.9949 0.9962 09972 0.9979 0.9985 0.9951 0.9963 0.9973 0.9980 0.9986 0.9952 09964 0.9974 0.9981 0.9986 3.0 3.1 3.2 3.3 3.4 0.9987 0.9990 0.9993 0.9995 0.9997 0.9987 0.9991 0.9993 0.9995 0.9997 0.9987 0.9991 0.9994 0.9995 0.9997 0.9988 0.9991 0.9994 0.9996 0.9997 0.9988 0.9992 0.9994 0.9996 0.9997 09989 0.9992 0.9994 0.9996 0.9997 0.9989 0.9992 0.9994 0.9996 0.9997 0.9989 0.9992 0.9995 0.9996 0.9997 0.9990 0.9993 0.9995 0.9996 0.9997 0.9990 0.9993 0.9995 0.9997 0.9998
