Question 1. Bruno Ltd produces widgets that sell for $165 each. Unit sales are presently 7,500 and variable cost per unit is $95.00. Fixed operating costs are $360,000 per year. The firm currently has outstanding debt of $1,400,000 with an interest cost of 11% per annum. It has 5,000 ordinary shares on issues and has forecast an interim dividend of $1.10 per share. The firm is expecting a 10 percent increase in sales and pays tax at the rate of 30 percent. Based on the firm's current sales per year and an expected 10% increase in sales calculate the firm's DOL, DFL and DTL. Question 2. Bear Ltd currently has on issue $5,000,000 10% bonds It is considering purchasing a new widget making machine which will cost $7,000,000. Two options for financing the machine have been provided by the finance manager. 1.Borrow from the bank at a rate of 12%. 2.Sell ordinary shares for $20 each. There are 1,000,000 ordinary shares already issued. Tax rate is 30 per cent. a)Given an EBIT of $1,500,000, calculate the EPS of the options. b)Calculate the indifference points for the options. Question 3. Sophie Pharmaceuticals Ltd has 10 million ordinary shares on issue. The current market price is $12.00 per share. However, the company manager knows that the results of some recent drug tests have been remarkably encouraging, so that the 'true' value of the shares is $14 Unfortunately because of confidential patent issues Sophie Pharmaceuticals cannot yet announce these test results. In addition, Sophie Pharmaceuticals has a property investment opportunity that requires an outlay of $10 million and has a net present value of $0.75 million. At present, Sophie Pharmaceuticals has little spare cash or marketable assets, so if this investment is to be made it will need to be financed from external sources. The existence of this opportunity is not known to outsiders and is not reflected in the current share price. a)Should Sophie Pharmaceuticals make the new investment? b)If so, should the investment be made before or after the share market learns the true value of the company's existing assets? c)Should the investment be financed by issuing new shares or by issuing new debt? Question 4. Black Ltd share capital consists of 1,000,000 issued ordinary shares which are currently selling for $3.00. It currently has no debt. Its current earnings per share is $0.80. It currently pays tax at the 30% rate. a)What is the firm's current cost of equity? b)What is the firm's current weighted average cost of capital? The firm now wishes to borrow $600,000 debt which will be used to retire shares.. Interest charged on the new debt is 10%. c)What is the value of the levered firm after it acquires the debt? d)What is the value of the firm's equity following acquiring the new debt? e)What is the firm's cost of equity after acquiring the new debt? f)What is the weighted average cost of capital after acquiring the new debt? Question 5. Percentage of Sales Approach – Assume all spontaneous variables move as a percentage of sales. a)Given an expected increase in sales of 10%, what is the amount of external funding required? b)To maintain the current debt/equity ratio how much debt and how much equity is required? (use Long -term debt / Shareholder equity) c)Assuming the company is only operating at 93.4% capacity, how much new funding (if any) is required? Question 6. a)Given an expected increase in sales of 12%, what is the amount of external funding required? b)At this growth rate what is the addition to retained earnings? c)Calculate the Sustainable Growth Rate (SGR) d)At the SGR what external funding is required? e)What would be the growth rate at which no external financing would be required? Question 7. a)You wish to determine the total assets to sales ratio consistent with a growth in sales of 25% next year and have the following other target variables. Net Profit to Sales = .05, Debt to Equity = .50, Dividends to be paid = $4 and you wish to inject new equity of $10. Ignoring tax. Total sales are $300 and total assets are $150. b)If the sales to assets ratio calculated in (a) above is not available and you expect it to be 1.70 instead, what would be the debt to equity ratio consistent with this. Assume the same variables as used in part (a) Net Profit to Sales = .05, Debt to Equity = .50, Dividends to be paid = $4 and you wish to inject new equity of $10. Expected growth in sales = 25% Ignoring tax. Total sales are $300 and total assets are $176.47. c)Assume you now determine that the company can grow sales at 20%. It also wishes to raise no new capital and has other target variables of Sales to Assets = 1.90, Debt to Equity = .60, Dividends to be paid = $4. Ignoring tax. Total sales are $300 and total assets are $157.89. What net profit margin would need to be achieved in order for this to happen Question 8. Glad Ltd is considering the installation of a new computer. Because of uncertainty as to its future computing requirements and the prospect of advancements in computing technology, it is evaluating the acquisition of the computer by either purchasing it, or leasing it. Information relevant to the company's evaluation is as follows: Purchase - Loan The company applies straight line depreciation. The Tax Commissioner allows a 33.33% depreciation rate on computer capital acquisitions. Glad Ltd plans to operate the computer for a maximum of 5 years. The computer's disposal value at the end of 5 years is estimated to be $100,000. Glad would borrow the $1,600,000 to cover the purchase cost with a 5 year loan at 11% per annum Lease There would be five annual lease payments payable with the first payment made at time zero. A residual payment of $95,000 would be made at the end. The company income tax rate is 30 cents in the dollar. a)Calculate the lease payment. b)Should the company purchase or lease the asset? Question 9. Offshore Metal Openings (OMO) is preparing to raise $30 million through a rights issue. After a public announcement the share price steadied at about $3.5 per share. There are 100 million shares on issue. OMO's financial staff have proposed two plans — Plan A's subscription price is $3 Plan B's subscription price is $1.50. Assuming both plans are successful: a)Determine the number of shares issued under each plan. b)How many shares currently held will be required to purchase a new share? c)What should be the ex-rights price of the shares in each plan? d)What should be the value of a right in each plan? e)Which plan is preferable? Why? Question 10. Calculate the current price and the duration of the following debentures, each of which has a face value of $1000. Assume that coupon payments are made at the end of each year. The current market interest rate is 9 per cent. a)Calculate the price of these bonds at 9% b)Calculate the duration of these bonds at 9% c)Calculate what the price of these debentures would be if the market interest rate increased to 11 percent. d)What would be the capital gain or loss on each debenture? e)Calculate the duration of these bonds at 11% f)Discuss your findings Question 11. Using both the Duration and Modified Duration functions calculate the duration and modified duration Question 12. You have just taken out a 15-year loan for $400,000 payable monthly with the first payment to be made on the 1st September 2016. The annual rate of interest is 7.5% per annum. On each succeeding 1st September (i.e. 2017, 2018 etc.) you make an extra payment of $10,000. Prepare an amortisation schedule which identifies the payment amount, the principal and interest components of each payment. When will the loan be paid out and what is the amount of the final payment? Question 13. Debenture Face Value $100 Coupon Rate 10% Discount Rate 10% 50% probability that rates will fall to 6.666% 70% probability that rates will increase to 20% Par value $100 a)Calculate the Market Price of the Non-Callable Debenture b)What would the coupon rate need to be for the debentures to sell at par? c)Calculate the cost of the call provision Question 14. Tools Ltd has a fixed cost associated with buying and selling marketable securities of $35. The daily marginal yield on the firm's investment is 0.012 per cent per day, and Tools has estimated that the standard deviation of net cash flows is $1500. Management has set a lower Limit of $20000 on cash holdings. Calculate the target cash balance and upper limit using the Miller-Orr model. Question 15. The Brown Paint Company uses 90 000 litres of pigment per year. The cost of ordering pigment is $170 per order and the cost of carrying the pigment in inventory is $1.10 per litre per year. The firm uses pigment at a constant rate every day throughout the year. a)Calculate the economic order quantity (EOQ). b)Calculate the ordering cost. c)Calculate the ordering days d)Calculate the holding cost e)Calculate the average inventory f)Calculate the annual total cost g)Assuming that it takes 14 days to receive an order once it has been placed, determine the reorder point in terms of litres of pigment. (Note: Use a 365-day year.) Question 16. Calculate the Black—Scholes European option price for a call option and put option with the following features: share price $24.00, exercise price $22.50, term to expiry 1 year, risk-free interest rate 5 per cent per annum (compounding annually) and volatility (variance) 0.08 per annum. Question 17. Determine the profit and/or loss to the following: Question 18. The company is planning to switch from a cash basis to offering credit terms. a)Calculate the cost of switching using both the NPV, One Shot and the Accounts Receivable Approaches. b)What would be the new quantity sold that would lead to the break-even point. c)If the new Credit price was set at $50 per Unit and 2% of sales were uncollectable, calculate the NPV of the switch. d)Calculate the default rate that makes NPV equal to zero. e)Calculate the NPV associated with a One-Time Sale. f)Calculate the percentage chance the company would have of collecting given the one time sale extension of credit. g)Calculate the NPV associated with a repeat sale. Question 19. Busy Ltd is considering the acquisition of Bee Finance. The values of the two companies as separate entities are $7 million and $4.5 million, respectively. Busy estimates that by combining the two companies it will reduce selling and administrative costs by $300,000 per annum in perpetuity. Busy can either pay $5 million cash for Bee or offer Bee a 50 per cent holding in Busy. If the opportunity cost of capital is 9 per cent per annum: (a)what is the gain, in present value terms, from the merger? (b)what is the net cost of the cash offer? (c)what is the net cost of the share alternative? (d)what is the NPV of the acquisition under: the cash offer? the share offer? Question 20. You are an analyst for Black Ltd which is considering the acquisition of Beard Ltd. You have identified the following effects of the takeover: Investment of $600,000 will be required immediately to upgrade some of Beard's older assets; Asset upgrading, economies of scale and improved efficiency will increase net operating cash flows by $300,000 per annum in perpetuity; Some of Beard's assets which have been producing a cash inflow of $70,000 per annum will be sold. The new owners of these assets should be able to use them more profitably and sale proceeds are expected to be $810,000; New plant costing $1.25 million will be purchased and is expected to generate net operating cash flows of $20,000 per annum in perpetuity. Beard's activities are all of the same risk and the required rate of return is 11 per cent per annum. Beard has 5 million shares on issue with a market price of $2.5. Assuming that the market price equals value as an independent entity: a)Estimate the gain from the takeover; and b)Estimate the maximum price that Endeavour should be prepared to pay for Beard's shares.