Sign MBL5903-2017-10-E-1 PAST EXA X + File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E... Question 1 [14 marts) You plan to Invest in the Kish Hedge Fund, which has total capital of 500 million rivested on five stocks Stock Investment Stock's Beta Coefficient A 160 million 05 B 120 millon 12 80 million 18 D 80 million 10 E 60 million 16 Kish's beta coefficient can be found as a weighted average of its stocks' betas The nisk-free rate is 6%, and you beleve the following probability distnbution for future market returns is realistic Market Return Probability 01 02 04 -28% 0 12 30 50 02 01 11 12 13 What is the equation for the security market line (SML.)? (4) Calculate Kish's required rate of return (6) Suppose Rick Kish, the prosident, receives a proposal from a company seeking new capital The amount needed to take a position in the stock is R50 million, it has an expected return of 15% and its estrated beta is 15 Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock? (4) e o ti MBUS903-2017-10-E-1 PAST EXA X + O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E... Sign in 11 1 2 13 What is the equation for the secunty market line (SML)? Calculate Kish's required rate of return (6) Suppose Rick Kish, the president, receives a proposal from a company seeking new capital The amount needed to take a position in the stock is R50 million, it has an expected return of 15%, and its estmated beta s 15 Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock? Question 2 (12 marks] Barrett Industnos invests a large sum of money in R&D, as a result, it retains and reinvests all of its samnings in other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near futuro. A major pension fund is interested in purchasing Barrett's stock The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows R3 million, R6 million, R10 million, and 15 million After the fourth year, free cash flow is projected to grow at a constant 7% Barrett's WACC 12%, the market value of its debt and preferred stock totals R60 million, and it has 10 million shares of common stock outstanding What is the present value of the free cash flows projected during the next 4 years? (3) What is the firm's horizon, or continuing, value? (3) 21 22 (TURN OVER] O RH MBL5903-2017-10-E-1 PAST EXA X + Sign t O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E. A MBL5003 OCTOBER NOVEMBER 2017 23 (3) What is the firm's total value today? What is an estimate of Barrett's pnce per share? 24 Question 3 [12 marks) Adams Corporation is considering four average-nek projects with the following costs and rates of return Project 1 Cost R 2000 3 000 5 000 2 Expected Rate of Return 16 00% ho 15 00% 13.75% 12 50% 3 2000 The company estimates that it can issue debt at a rate of ra 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of R500 per year at R49 00 per share Also, its common stock currently sells for R3600 per share, the next expected dividend, D1, is R3 50, and the dividend is expected to grow at a constant rate of 6% per year The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock 31 What is the cost of each of the capital components? 32 What is Adams's WACC? Only projects with expected returns that exceed WACC will be accepted Which projects should Adams accept? (3) (6) 33 Question 4 [20 marks] Your division is considering two projects The WACC is 10% and the projects' after-tax cash flows (in ORI X MBL5903-2017-10--1 PAST EXA X + File c/Users/daisy/Desktop/MBL5903/MBL5903-2017-10 E-1%20PAST%20E... * Sign in Question 4 (20 marks] Your division is considering two projects The WACC is 10%, and the projects' after-tax cash flows (in millions of rands) would be as follows Year Project A Project B 0 -830 -R30 20 1 5 2 10 10 15 3 4 8 6 20 41 42 43 Calculate the projects' NPVs, regular paybacks, and discounted paytracks (10) If the two projects are independent, which project(s) should be chosen? (1) If the two projects are mutually exclusive and the WACC S 10%, which project(s) should be chosen? (1) 320 35 [TURN OVER AN MBL5903 Tch 33 ENG 17:46 2020/10/25 Sign in MBL5903-2017-10-E-1 PAST EXA X O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E... NBL 5903 OCTOBER NOVEMBER 2017 44 45 46 Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explan your answer (2) Now look at the regular and discounted paybacks Which project looks better when judged by the paybacks? (1) If the payback was the only method a company used to accept or reject projects, what payback should choose as the cutoff point, that is, reject projects of their paybacks are not below the chosen cutoff? Is your selecticutoff based on some economic crtena, or is it more or less arbitrary? Are the cutoff cntena equally arbitrary when company use the NPV and/or the IRR as the critena? Explain (3) Why do most academics and financial executives regard the NPV as being the single best critenon and better than the IRA? Why do companies still calculato IRA? (2) 47 Question 5 [15 marks) Haley's Graphic Designs Inc is considering two mutually exclusive projects. Both projects require an initial investment of R10 000 and are typical average-nsk projects for the company Project A has an expected life of 2 years with after-tax cash inflows of R6 000 and R8 000 at the end of Years 1 and 2 respectively. Project B has an expected life of 4 years with after-tax cash inflows of 14 000 at the end of each of the next 4 years. The company's WACC is 10% 51 If the projects cannot be repeated, which project should be selected if Haley uses NPV as its cntenon for project selection? (6) 5.2 Assume that the projects can be repeated and that there are no anticipated changes in the cash flows Use the replacement chain analysis to determine the NPV of the project selected (5) O BI e ENG File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E- 44 45 NBL5000 OCTOBER NOVEMBER 2017 Is possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explan your answer (2) Now look at the regular and discounted paybacks Which project looks better when judged by the paybacks? the payback was the only method a company used to accept or reject projects, what payback should choose as the cutoff point, that is, reject projects of their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic antena, or is it more or less arbitrary? Are the cutoff critena equally arbitrary when company use the NPV and/or the IRR as the crtena? Explain (3) 47 Why do most academics and financial executives regard the NPV as being the singlo best crtenon and better than the IRR? Why do companies still calculate IRA? (2) 46 Question 5 [15 marks) Haley's Graphic Designs Inc is considenng two mutually exclusivo projects. Both propects require an initial investment of R10 000 and are typical average-nsk projects for the company Project A has an expected life of 2 years with after-tax cash inflows of R6 000 and R8 000 at the end of Years 1 and 2. respectively. Project has an expected life of 4 years with after-tax cash inflows of R4 000 at the end of each of the next 4 years. The company's WACC is 10% of the projects cannot be repeated, which project should be selected of Haley uses NPV as its critenon for project selection? Assume that the projects can be repeated and that there are no anticipated changes in the cash flows Use the replacement chain analysis to determine the NPV of the project selected Make the same assumptions as in cad5 2.sing the equivalent annual FA Almathed 07 51 5.2 53 33 ENG 2021 MBL5903-2017-10-E-1 PAST EXA X Sign in O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E.. pu 5.2 Assume that the projects can be repeated and that there are no anticipated changes in the cash Nows Use the replacement chain analysis to determine the NPV of the project selected (5) Make the same assumptions as n part 5 2 Using the equivalent annual annuity (EAA) method, what is the EM of the project selected? (4) 53 Question [7 marks] Truman Industness considenng an expansion The necessary equipment would be purchased for R9 million, and the expansion would require an additional R3 million investment in net operating working capital The tax rate is 40% 61 What is the intal investment or tlay? (2) 62 The company spent and expensed R50 000 on research related to the project last year Would this change your answer? Explain (3) 63 The company plans to use a building that it owns to house the project. The building could be sold for R1 milion after taxes and real estate commissions How would that fact affect your answer? (2) 02D 35 ITURN OVER] o * ENG Sign MBL5903-2017-10-E-1 PAST EXA X + File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E... Question 1 [14 marts) You plan to Invest in the Kish Hedge Fund, which has total capital of 500 million rivested on five stocks Stock Investment Stock's Beta Coefficient A 160 million 05 B 120 millon 12 80 million 18 D 80 million 10 E 60 million 16 Kish's beta coefficient can be found as a weighted average of its stocks' betas The nisk-free rate is 6%, and you beleve the following probability distnbution for future market returns is realistic Market Return Probability 01 02 04 -28% 0 12 30 50 02 01 11 12 13 What is the equation for the security market line (SML.)? (4) Calculate Kish's required rate of return (6) Suppose Rick Kish, the prosident, receives a proposal from a company seeking new capital The amount needed to take a position in the stock is R50 million, it has an expected return of 15% and its estrated beta is 15 Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock? (4) e o ti MBUS903-2017-10-E-1 PAST EXA X + O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E... Sign in 11 1 2 13 What is the equation for the secunty market line (SML)? Calculate Kish's required rate of return (6) Suppose Rick Kish, the president, receives a proposal from a company seeking new capital The amount needed to take a position in the stock is R50 million, it has an expected return of 15%, and its estmated beta s 15 Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock? Question 2 (12 marks] Barrett Industnos invests a large sum of money in R&D, as a result, it retains and reinvests all of its samnings in other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near futuro. A major pension fund is interested in purchasing Barrett's stock The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows R3 million, R6 million, R10 million, and 15 million After the fourth year, free cash flow is projected to grow at a constant 7% Barrett's WACC 12%, the market value of its debt and preferred stock totals R60 million, and it has 10 million shares of common stock outstanding What is the present value of the free cash flows projected during the next 4 years? (3) What is the firm's horizon, or continuing, value? (3) 21 22 (TURN OVER] O RH MBL5903-2017-10-E-1 PAST EXA X + Sign t O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E. A MBL5003 OCTOBER NOVEMBER 2017 23 (3) What is the firm's total value today? What is an estimate of Barrett's pnce per share? 24 Question 3 [12 marks) Adams Corporation is considering four average-nek projects with the following costs and rates of return Project 1 Cost R 2000 3 000 5 000 2 Expected Rate of Return 16 00% ho 15 00% 13.75% 12 50% 3 2000 The company estimates that it can issue debt at a rate of ra 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of R500 per year at R49 00 per share Also, its common stock currently sells for R3600 per share, the next expected dividend, D1, is R3 50, and the dividend is expected to grow at a constant rate of 6% per year The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock 31 What is the cost of each of the capital components? 32 What is Adams's WACC? Only projects with expected returns that exceed WACC will be accepted Which projects should Adams accept? (3) (6) 33 Question 4 [20 marks] Your division is considering two projects The WACC is 10% and the projects' after-tax cash flows (in ORI X MBL5903-2017-10--1 PAST EXA X + File c/Users/daisy/Desktop/MBL5903/MBL5903-2017-10 E-1%20PAST%20E... * Sign in Question 4 (20 marks] Your division is considering two projects The WACC is 10%, and the projects' after-tax cash flows (in millions of rands) would be as follows Year Project A Project B 0 -830 -R30 20 1 5 2 10 10 15 3 4 8 6 20 41 42 43 Calculate the projects' NPVs, regular paybacks, and discounted paytracks (10) If the two projects are independent, which project(s) should be chosen? (1) If the two projects are mutually exclusive and the WACC S 10%, which project(s) should be chosen? (1) 320 35 [TURN OVER AN MBL5903 Tch 33 ENG 17:46 2020/10/25 Sign in MBL5903-2017-10-E-1 PAST EXA X O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E... NBL 5903 OCTOBER NOVEMBER 2017 44 45 46 Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explan your answer (2) Now look at the regular and discounted paybacks Which project looks better when judged by the paybacks? (1) If the payback was the only method a company used to accept or reject projects, what payback should choose as the cutoff point, that is, reject projects of their paybacks are not below the chosen cutoff? Is your selecticutoff based on some economic crtena, or is it more or less arbitrary? Are the cutoff cntena equally arbitrary when company use the NPV and/or the IRR as the critena? Explain (3) Why do most academics and financial executives regard the NPV as being the single best critenon and better than the IRA? Why do companies still calculato IRA? (2) 47 Question 5 [15 marks) Haley's Graphic Designs Inc is considering two mutually exclusive projects. Both projects require an initial investment of R10 000 and are typical average-nsk projects for the company Project A has an expected life of 2 years with after-tax cash inflows of R6 000 and R8 000 at the end of Years 1 and 2 respectively. Project B has an expected life of 4 years with after-tax cash inflows of 14 000 at the end of each of the next 4 years. The company's WACC is 10% 51 If the projects cannot be repeated, which project should be selected if Haley uses NPV as its cntenon for project selection? (6) 5.2 Assume that the projects can be repeated and that there are no anticipated changes in the cash flows Use the replacement chain analysis to determine the NPV of the project selected (5) O BI e ENG File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E- 44 45 NBL5000 OCTOBER NOVEMBER 2017 Is possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explan your answer (2) Now look at the regular and discounted paybacks Which project looks better when judged by the paybacks? the payback was the only method a company used to accept or reject projects, what payback should choose as the cutoff point, that is, reject projects of their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic antena, or is it more or less arbitrary? Are the cutoff critena equally arbitrary when company use the NPV and/or the IRR as the crtena? Explain (3) 47 Why do most academics and financial executives regard the NPV as being the singlo best crtenon and better than the IRR? Why do companies still calculate IRA? (2) 46 Question 5 [15 marks) Haley's Graphic Designs Inc is considenng two mutually exclusivo projects. Both propects require an initial investment of R10 000 and are typical average-nsk projects for the company Project A has an expected life of 2 years with after-tax cash inflows of R6 000 and R8 000 at the end of Years 1 and 2. respectively. Project has an expected life of 4 years with after-tax cash inflows of R4 000 at the end of each of the next 4 years. The company's WACC is 10% of the projects cannot be repeated, which project should be selected of Haley uses NPV as its critenon for project selection? Assume that the projects can be repeated and that there are no anticipated changes in the cash flows Use the replacement chain analysis to determine the NPV of the project selected Make the same assumptions as in cad5 2.sing the equivalent annual FA Almathed 07 51 5.2 53 33 ENG 2021 MBL5903-2017-10-E-1 PAST EXA X Sign in O File C:/Users/daisy/Desktop/MBL5903/MBL5903-2017-10-E-1%20PAST%20E.. pu 5.2 Assume that the projects can be repeated and that there are no anticipated changes in the cash Nows Use the replacement chain analysis to determine the NPV of the project selected (5) Make the same assumptions as n part 5 2 Using the equivalent annual annuity (EAA) method, what is the EM of the project selected? (4) 53 Question [7 marks] Truman Industness considenng an expansion The necessary equipment would be purchased for R9 million, and the expansion would require an additional R3 million investment in net operating working capital The tax rate is 40% 61 What is the intal investment or tlay? (2) 62 The company spent and expensed R50 000 on research related to the project last year Would this change your answer? Explain (3) 63 The company plans to use a building that it owns to house the project. The building could be sold for R1 milion after taxes and real estate commissions How would that fact affect your answer? (2) 02D 35 ITURN OVER] o * ENG