Financial Management Question 1 Single Period Capital Rationing

Financial Management Question 1 Single Period Capital Rationing The following table presents the cash flows associated with Projects A, B, C, D, E and F. Year 0 1 2 3 4 A -100000 20000 40000 60000 80000 B -150000 -50000 100000 100000 140000 C -60000 20000 40000 40000 D -100000 60000 60000 100000 E -50000 20000 40000 60000 40000 F -100000 30000 30000 30000 30000 Assuming that the firm only has available $300,000 and applies capital rationing. Assume also that fractions of investment can be undertaken. I.e. they are divisible. The cost of capital is 10%. a) Which projects should be acquired? b) What is the total NPV of the projects acquired? Now assume that fractions of investment cannot be undertaken. c) Which projects should be acquired? d) What is the total NPV of the projects acquired? Assume now that Projects A and E are mutually exclusive and the projects are divisible. e) Which projects should be acquired? f) What is the total NPV of the projects acquired? Question 2 Black Ltd has identified the following two projects Project Project A B Year Cash Flow Cash Flow 0 -100000 -140000 1 30000 53000 2 35000 53000 3 40000 53000 4 45000 53000 5 55000 53000 a) Calculate the Net Present Value for each project. b) Calculate the Internal Rate of Return for each project c) Using discount rates of 0 per cent, 10 per cent and 20 percent and the IRR calculated above construct a table that could be used to draw the present value profiles for each project. d) Comment on the acceptability and preferability of the projects. Question 3 An extract of Green Ltd’s Balance Sheet is as follows Assets Accounts Receivable $ 125,000 Inwntories $ 185,000 Property, Plant & Equipment $3,793,000 Prepayments $ 12,000 TOTAL ASSETS $4,115,000 Liabilities Accounts Payable $ 90.000 Bank Overdraft $ – Accrued Revenue $ 25,000 Debettires $ 1,500,000 TOTAL LIABILITIES $ 1,615,000 NET ASSETS $2,500,000 Shareholders Equity Preference Shares $ 400,000 Ordinary Shares $ 1,500,000 General Reserve $ 125,000 Retained Profit $ 475,000 TOTAL SHAREHOLDERS EQUITY $2,500,000 The bonds are currently selling at $245.33 and were issued originally at a face value of $200. The preference shares were originally issued at a price of $5 each and are currently selling for $5.75 each. The ordinary shares were originally issued at a price of $15 each and are currently selling for $23.00 each. The company believes it current financing mix is the one that delivers its long-term optimal target weights. The company wishes to determine its weighted marginal cost of capital The company has compiled the following data Cost Source of Capital Range of Financing after Tax Long Term Debt $0 to $300,000 6.5% $300,001 to $600,000 7.5% $600,001 and above 9.0% Preference Shares 0.00 to $100,000 9.5% $100,001 and above 10.0% Ordinary Shares $0 to $500,000 11.0% $500,001 to $1,000,000 12.5% $1,000,001 and above 14.0% Available Investments Investment Initial Useful Annual Opportunity Investment Life Cash Flows A -$200,000 4 $68,641 B -$300,000 6 $72,967 C -$500,000 8 $97,161 D -$300,000 3 $120,635 E -$600,000 5 $154,254 F -$100,000 7 $19,207 a) Determine the breaking points and ranges of total financing associated with each source of capital; b) Using the data developed in a., determine the levels of total financing at which the firm’s weighted average cost of capital (WACC) will change; c) Calculate the weighted average cost of capital and the weighted marginal cost of capital (WMCC) for each range of total financing found in b; d) Using the results of c. along with the information on the available investment opportunities compile the firm’s investment opportunities schedule (lOS), plot this schedule and plot the weighted marginal cost of capital e) Which if any of the available investments would you recommend that the firm accept? Explain your answer f) Assume now that Project C is unavailable. Which if any of the available investments would you recommend that the firm accept? Explain your answer Question 4. Explain the common sources of risk affecting financial managers and shareholders

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