FNCE90065 FUNDAMENTALS OF FINANCE ASSIGNMENT 2
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FNCE90065 FUNDAMENT ALS O F FINANCE
ASSIGNMENT 2
Question 1. You have been given the following information about a company. The centre column is based on audited results for its financial year ending 30 June 2019, while the right column is an expert’s forecast of future change.
|
2018-9 Actual ($ mill) |
Expected change (% PA) |
Gross revenue |
1200 |
3 |
Fixed costs |
250 |
1 |
Variable costs |
700 |
2.5 |
Working capital |
120 |
3 |
Annual investment |
125 |
3 |
Assume: all cash flows are at financial year end; corporate tax is 30 percent, depreciated value of PPE equals $750 million and average depreciation is 10 percent on a straight line basis; the company’s only debt is a loan of $300 million with fixed interest of 8 percent per annum, with principal repayable in 2030; the company has 500 million shares on issue.
a) Use discounted cash flow analysis with a discount rate of 12 percent PA to calculate the company’s net present value at 30 June 2020
b) Use an alternative method to validate your estimate of the company’s NPV
c) On 25 June 2020, the company’s share price closed at $8.50. In light of valuations above, what advice would you give an investor who is considering buying shares in the company.
Clearly describe any assumptions you made and their justification.
Question 2
Think of an example of a real option. Describe it, and the elements of the option.
Question 3
A corporation is considering purchasing one of two machines, A and B. The cash flows of each of the projects are represented below. The project’s required rate of return is 10% per annum. Since these projects are mutually exclusive, which proposal (if any) should the manufacturer choose?
Year |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
Project A |
– 10,000 |
4,000 |
4,000 |
4,000 |
4,000 |
4,000 |
4,000 |
Project B |
– 12,000 |
5,000 |
5,000 |
5,000 |
5,000 |
5,000 |
5,000 |
2022-11-09