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GROUP ASSIGNMENT

BWFF2023 A112
FINANCIAL MANAGEMENT II

QUESTION 1
You are trying to plan for retirement in 10 years, and currently you have RM150,000 in a
savings account and RM250,000 in common stocks. In addition, you plan to add to your
savings by depositing RM8,000 per year in your savings account at the end of each of the
next 5 years and then RM10,000 per year at the end of each year for the final 5 years until
retirement.
i.

Assuming your savings account returns 8 percent compounded annually


while your investments in stocks will return 12 percent compounded
annually, how much will you have at the end of 10 years? (Ignore taxes.)

ii.

Assuming that you expect to live for 20 years after your retirement, and at
the beginning of retirement, you deposit all of your savings (answer from
i) in a bank account paying 11 percent annual interest. How much can you
withdraw each year after retirement (20 equal withdrawals, starting a year
after retirement) to end up with a zero balance at death?

QUESTION 2
You are considering three investments. The first is a bond that is selling in the market at
RM1,200. The bond has a RM1,000 par value, pays interest at 14 percent, and is
scheduled to mature in 12 years. For the bonds of this risk class you believe that a 12
percent rate of return should be required. The second investment that you are analyzing is
a preferred stock (RM100 par value) that sells for RM80 and pays an annual dividend of
RM12. Your required rate of return for this stock is 14 percent. The last investment is a
common stock (RM35 par value) that recently paid a RM3 dividend. The firms earnings
per share have increased from RM4 to RM8 in 10 years, which also reflects the expected
growth in dividends per share for the indefinite future. The stock is selling for RM25, and
you think a reasonable required rate of return for the stock is 20 percent.
a.

Calculate the value of each security based on your required rate of return.

b.

Which investment(s) should you accept? Why?

c.

i.

If your required rates of return changed to 14 percent for the bond,


16 percent for the preferred stock, and 18 percent for the common
stock, how would your answers change to questions (a) and (b)?

ii.

Assuming again that your required rate of return for the common
stock is 20 percent, but the anticipated constant growth rate
changes to 12 percent, would your answers to questions (a) and (b)
be different?

QUESTION 3

You are evaluating the potential purchase of a small business currently generating
RM42,500 of after-tax cash flow (D0 = RM42,500). Based on a review of similar-risk
investment opportunities, you must earn an 18 percent rate of return on the proposed
purchase. Since you are relatively uncertain as to future cash flows, you have decided to
estimate the company's value using several possible cash flow growth rate assumptions.
a) What is the company's value if cash flows are expected to grow at an annual rate
of 0 percent to infinity?
b) What is the company's value if cash flows are expected to grow at a constant
annual rate of 7 percent to infinity?
c) What is the company's value if cash flows are expected to grow at an annual rate
of 12 percent for the first two years followed by a constant annual rate of 7
percent from year three to infinity?
d) Briefly explain why intrinsic value is used to evaluate the desirability of financial
assets.

QUESTION 4
Last year Gator Getters, Inc. had $50 million in total assets. Management desires to
increase its plant and equipment during the coming year by $12 million. The company
plans to finance 40% of the expansion with debt and the remaining 60% with equity
capital. Bond financing will be at a 9% rate and will be sold at its par value. Common
stock is currently selling for $50 per share, and flotation costs for new common stock will
amount to $5 per share. The expected dividend next year for Gator is $2.50. Furthermore,
dividends are expected to grow at a 6% rate far into the future. The marginal corporate
tax rate is 34%. Internal funding available from additions to retained earnings is
$4,000,000.
a. What amount of new common stock must be sold if the existing
capital structure is to be maintained?
b. Calculate the weighted marginal cost of capital at an investment
level of $12 million.

QUESTION 5
APM Co. currently owns a machine that has 5 years of useful remaining years. Its current
net book value is RM50,000. It is being depreciated using simplified straight line method
to zero salvage value in 5 years. The existing machine generates RM60,000 per year in
sales revenue, requiring RM20,000 in operating expenses. If the firm sells the machine
now, it could get RM30,000 for it.
The firm is considering buying a new machine to replace the existing machine. The new
machine costs RM100,000, needs RM5,000 to be installed properly and will result in an
increase in earnings before interest and taxes of RM85,000 a year. This machine has an
expected life of 5 years, after which it will have no salvage value. The firm uses
simplified straight line method for depreciation. To operate this machine properly,
workers would have to go through a training session that would requireRM10,000. The
machine would also require an increase in inventory of RM15,000 and increase in
account payable of RM5,000. Assume the tax rate is 28% and a required rate of return of
15%.
Questions:
a. Calculate the initial outlays.
b. Calculate the annual cash flows for year 1 until 5.
c. Calculate the terminal cash flow.
d. Calculate the NPV from replacing the old machine. Should investment in the new
machine be accepted or rejected? Why?

QUESTION 6
Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an
existing machine. The old machine is bought 5 years ago for RM20,000 and still has a
remaining economic life of 3 years. The salvage value after 3 years is RM3,000. It can be
sold for RM9,000 today. The estimated revenue for the next 3 years for old machine is:
Year
Old Machine
1
RM15,000
2
RM15,000
3
RM15,000
However, to replace the old machine, Topsider has 2 options to choose from; Cutting
Machine A and Cutting Machine B. Information about these 2 machines can be found
below:
Cutting Machine A
The machine costs RM 26,000. Because of new sales, we will increase our inventory by
RM10,000, our account receivable by RM15,000 and account payable by RM7,800. The
machine has a 3-year life and salvage value of RM4,100. Transportation cost is estimated
at RM5,000. The operating costs will rise RM1,000 per year.
Cutting Machine B
The machine costs RM 32,000. Because of new sales, we will increase our inventory by
RM15,000, our account receivable by RM19,000 and account payable by RM10,000. The
machine has a 3-year life and salvage value of RM6,500. Transportation is estimated at
RM9,000. The operating costs will rise RM2,000 per year.
The estimated revenues for the next 3 years for each new machine:
Year
Cutting Machine A
Cutting Machine A
1
RM24,000
RM25,000
2
RM26,000
RM30,000
3
RM30,000
RM45,000
Additional information:
The Marginal tax rate = 34%
Required rate of return = 12 %
Using simplified straight-line deprecation
Calculate the following cash flow for the Cutting Machine A and for the Cutting Machine
B:
a.
b.
c.
d.
e.

The initial Outlay in Year 0.


The annual cash flows for Year 1-3.
The terminal value in Year 3.
The NPV.
Which machine to choose based on your answer in (d)?

QUESTION 7a
Determine the IRR on the following projects:
a. Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836
for seven years
b. Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000
for seven years
c. Initial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for
three years
QUESTION 7b
Discuss the merits and shortcomings of using the payback period for capital budgeting
decisions.
QUESTION 7c
Project November requires an initial investment of $500,000. The present value of
operating cash flows is $550,000. Project December requires an initial investment of
$750,000. The present value of operating cash flows is $810,000.
a. Compute the profitability index for each project.
b. If the the projects are mutually exclusive, does the profitability index rank them
correctly?
QUESTION 7d
Black Friday Inc. has estimated the following cash flows for a project it is considering:
Period
Cash Flow
0
($150,000)
1
$70,000
2
$80,000
3
($100,0000)
a. What is the payback period for this project?
b. What is the obvious problem with using the payback method in this case?

QUESTION 8
You are given the following information.
Output level
Total fixed cost
Variable cost per unit
Interest
Total asset
Total asset turnover
** Total asset turnover = sales / Total asset

10,000 units
RM45,000
RM 6.00
RM3,000
RM20,000
6

Based on the above data, you are required to :Questions:


a) Calculate the degree of operating leverage (DOL)
b) Calculate the degree of financial leverage (DFL)
c) Calculate the degree of combined leverage (DCL)
d) Calculate the breakeven in units (QBE)
e) Calculate the breakeven in dollar (SBE)

QUESTION 9
The Megastructure Airplane Company has the following modified income statement (RM
000) at 150,000 units of production.
Revenues
Variable costs
Fixed costs
EBIT
Interest at 10%
EBT
Tax 35%
EAT
Number of shares

RM
10,000
6,500
2,200
1,300
500
800
320
480
20,000

i.

What is Megastructures contribution margin?

ii.

What is Megastructures dollar break-even point?

iii.

Calculate Megastructures degree of financial leverage (DFL).

iv.

Calculate Megastructures degree of operating leverage (DOL).

v.

Calculate Megastructures degree of combined leverage (DCL).

QUESTION 10
The management of One-M Berhad is considering an expansion project for their current
business. RM125,000 is needed for the expansion and two options has been proposed.
Under Option I, the project will be financed by issuing new common stocks that can be
sold for RM5 per share. Option II involves the use of financial leverage. A 10-year bond
can be issued with 8% coupon rates. The company corporate income tax is 30% and the
existing preferred stock pay dividends of RM4 per share. The existing capital structures
for One-M Berhad are as follows:
Bonds:
(9% RM1,000 par value)

RM
20,000

Preferred Stock:
(RM25 par value)

15,000

Common Stock:
(RM2 par value)

25,000

Questions:
a) Calculate the indifference point of EBIT-EPS for the two financial proposals.
b) If EBIT is expected to be RM 20,000, which financial proposal should you
select? Why? (show your calculation)

QUESTION 11
A firm is analyzing two different capital structures for financing a new project that will
cost RM100,000. The two structures are described below:
Plan A: finance with 50% debt
Debt (bonds)
RM50,000
Common equity
RM50,000
Plan B: finance with 90% debt
Debt (bonds)
RM90,000
Common equity
RM10,000
New common stock can be sold for RM10 per share. The bonds can be issued with a 8%
coupon rate. The firms existing shares are given below:
Preferred stock:
(RM100 par value)
RM 50,000
Common stock:
(RM2 par value)
RM40,000
The firm's existing shares of preferred stock pay dividends of RM2.00 per share. The
firms corporate tax rate is 28%.
a)

Calculate the indifference level of EBIT between the two plans.

b)

Proves your answer to show that the EPS will be the same regardless of the plan
chosen at the EBIT level found in part (a).

c)

Which financing plan would you expect to cause the greatest change in EPS
relative to a change in EBIT? Why?

d)

If EBIT is expected to be RM 30,000 , which plan will result in a higher EPS?


Show your answer using EBIT-EPS analysis chart.

QUESTION 12
Miya, a single investor owns 1000 shares of Advance C-Synergy (ACS), common stock.
She originally bought the stock two years ago at initial public offering (IPO) price at
RM5 per share. The stock of this fast growing technology company is currently trading
for RM21 per share, so the current value of her advance ACS stock is RM21,000 (RM21
x 1000). Because the firms board of director believe that the stock would trade more
actively in the RM 7 to RM8 price range, it just announced a 3-for-1 stock split.
Questions:
a) Compare the total value of Miyas stock holding before and after the stock split.
b) If the analyst believe that the price will fall 25% from the initial price after the
split, does Miya experience any gain or loss on the stock?

QUESTION 13
The DOTDOT Company has earnings available for common stockholders of RM4
million and has 320,000 shares of common stock outstanding at RM50 per share. The
firm is currently contemplating the payment of RM3.50 per share in cash dividends.
a) Calculate the firm's current earnings per share (EPS) and price/earnings (P/E)
ratio.
b) If the firm can repurchase stock at RM54 per share, how many shares can be
repurchased in order of making the proposed cash dividend payment?
c) How much will the EPS be after the proposed repurchased? Why?

QUESTION 14
A.

Define the following term.


i.

Declaration date

ii.

Ex dividend date

iii.

Payment date

iv.

Record date

B. Serikandi Berhad has an equity structure as follows:


Equity Structure of Srikandi Berhad as at 31 December 2008
____________________________________________________________
Common Stock (RM 1 par, 1,000,000 shares)
Contributed Capital in excess of par
Retained earnings
Total Common Stockholders Equity
i.

ii.

1,000,000
600,000
700,000
_________
2,300,000
=========

Srikandi Berhad has decided to pay 10 percent bonus share direct to the
existing shareholders. The market value of the company is RM 5. What is
the changes to the new equity structure of Serikandi Berhad?
If the company decided to split the shares 2:1, what is the new structure of
equity of Srikandi Berhad?

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