Question One You are a Financial Manager at ZIPP PLC, a bicycle wheel manufacturing firm located in the UK. Currently, the firm's ordinary shares have a market value of 25m. The firm's equity has a beta of 0.90, the expected market return is 12% per annum and the risk- free rate is 2% per annum. The firm's current market value of debt is 30m with 59,750 zero coupon bonds in issue that mature in 10 years. Each bond has a par value of 1000 and corporate taxes are 23% per annum. ZIPP PLC is considering moving its manufacturing to a domestic warehouse and has the following three contract options for a piece of new machinery: Contract 1 Cost 5m Service Cost 0.00 per annum Contract 2 10m 500.000 per annum Contract 3 22.5m 0.00 per annum Reinvestment rate 0% per annum 30% of gross cash flows per annum 0% per annum for parts Cash flows 2m per annum 2.5m per annum 3.5m per annum Length Infinite (so long as reinvestment (years) 5 15 continues) Required: a) Compute the Net-Present Value for the three contract alternatives and make a recommendation [40 marks) b) Calculate the Internal Rate of Return for Contract 1 and 2. Comment on whether you are able to make a choice between these contracts using only Internal Rate of Return [10 marks) c) Supposing the firm's bond price falls by 100. Compute the new weighted average cost of capital and comment on how this will change the NPV of the three contracts. [20 marks) d) | ZIPP issues 10 million 9% CUM IRRD preference shares with a notional value of 1.00 and a current market value of 15m, what is the firm's Weighted Average Cost of Capital? You may use the original data provided above for equity and debt. [30 marks] Question One You are a Financial Manager at ZIPP PLC, a bicycle wheel manufacturing firm located in the UK. Currently, the firm's ordinary shares have a market value of 25m. The firm's equity has a beta of 0.90, the expected market return is 12% per annum and the risk- free rate is 2% per annum. The firm's current market value of debt is 30m with 59,750 zero coupon bonds in issue that mature in 10 years. Each bond has a par value of 1000 and corporate taxes are 23% per annum. ZIPP PLC is considering moving its manufacturing to a domestic warehouse and has the following three contract options for a piece of new machinery: Contract 1 Cost 5m Service Cost 0.00 per annum Contract 2 10m 500.000 per annum Contract 3 22.5m 0.00 per annum Reinvestment rate 0% per annum 30% of gross cash flows per annum 0% per annum for parts Cash flows 2m per annum 2.5m per annum 3.5m per annum Length Infinite (so long as reinvestment (years) 5 15 continues) Required: a) Compute the Net-Present Value for the three contract alternatives and make a recommendation [40 marks) b) Calculate the Internal Rate of Return for Contract 1 and 2. Comment on whether you are able to make a choice between these contracts using only Internal Rate of Return [10 marks) c) Supposing the firm's bond price falls by 100. Compute the new weighted average cost of capital and comment on how this will change the NPV of the three contracts. [20 marks) d) | ZIPP issues 10 million 9% CUM IRRD preference shares with a notional value of 1.00 and a current market value of 15m, what is the firm's Weighted Average Cost of Capital? You may use the original data provided above for equity and debt. [30 marks]
