0 Voturi pozitive0 Voturi negative

75 (de) vizualizări209 paginiF9 LSBF 2016

Nov 24, 2016

© © All Rights Reserved

PDF, TXT sau citiți online pe Scribd

F9 LSBF 2016

© All Rights Reserved

75 (de) vizualizări

F9 LSBF 2016

© All Rights Reserved

- Principles: Life and Work
- The Intelligent Investor, Rev. Ed
- The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness
- Business Adventures: Twelve Classic Tales from the World of Wall Street
- The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers
- The Nest
- Awaken the Giant Within: How to Take Immediate Control of Your Mental, Emotional, Physical and Financial
- Rich Dad Poor Dad: What The Rich Teach Their Kids About Money - That the Poor and Middle Class Do Not!
- MONEY Master the Game: 7 Simple Steps to Financial Freedom
- The Law of Sacrifice: Lesson 18 from The 21 Irrefutable Laws of Leadership
- Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
- I Will Teach You to Be Rich, Second Edition: No Guilt. No Excuses. No BS. Just a 6-Week Program That Works
- Secrets of Six-Figure Women: Surprising Strategies to Up Your Earnings and Change Your Life
- Bad Blood: Secrets and Lies in a Silicon Valley Startup
- The Total Money Makeover: A Proven Plan for Financial Fitness
- The Intelligent Investor Rev Ed.
- You Are a Badass at Making Money: Master the Mindset of Wealth
- The Intelligent Investor

Sunteți pe pagina 1din 209

Financial

Management

Class Notes

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior written

permission of Interactive World Wide Ltd.

2

www.studyinteractive.org

Contents

PAGE

INTRODUCTION TO THE PAPER

CHAPTER 1:

11

CHAPTER 2:

19

CHAPTER 3:

CAPITAL BUDGETING

27

CHAPTER 4:

39

CHAPTER 5:

55

CHAPTER 6:

COST OF CAPITAL

63

CHAPTER 7:

77

CHAPTER 8:

83

CHAPTER 9:

93

105

113

119

133

151

SOLUTIONS TO EXAMPLES

173

www.studyinteractive.org

www.studyinteractive.org

Introduction to the

paper

www.studyinteractive.org

The aim of the paper is to develop knowledge and skills expected of a financial

manager, in relation to investment, financing and dividend policy decisions.

A.

B.

C.

D.

Investment appraisal

E.

Business finance

F.

Business valuations

G.

Risk management

The syllabus is assessed by a three hour paper-based examination with 15 minutes

of reading time.

Section A of the exam comprises 20 multiple choice questions of 2 marks each.

Section B of the exam comprises three 10 mark questions and two 15 mark

questions.

FAQs

What level of mathematical ability is required in F9?

You will be required to apply formulae either given or memorised. This may require

limited manipulation of formulae. The level of computational complexity is normally

inversely related to the conceptual difficulty of the topic.

You will need pen, paper, these notes and revision kit. In addition you will need a

standard scientific calculator which may be purchased in any large newsagents or

supermarket.

The only real overlap is with basic concepts explored in paper F2 and also elements

of decision making and cost behaviour covered in paper F5.

www.studyinteractive.org

examination paper

www.studyinteractive.org

FORMULAE

Economic Order Quantity

=

2C0D

CH

Miller-Orr Model

Return point = Lower limit + (1/3 spread)

1

3

3

4 transaction cost variance of cash flows

Spread = 3

interest rate

E(ri) = Rf + i (E (rm) Rf)

V (1 T)

e

d

a =

e +

d

(Ve Vd(1 T))

(Ve Vd(1 T))

P0 =

D0(1 g)

D (1 g)

or P0 = 0

(Ke g)

(re g)

g = bre

WACC = e ke + d kd (1T)

Ve Vd

Ve Vd

(1 + i) = (1 + r)(1 + h)

S 1 = S0

(1 hc )

(1 hb )

F0 = S0

(1 ic )

(1 ib )

www.studyinteractive.org

Present value of 1 i.e. (1 + r)

Where r

n

=

=

-n

discount rate

number of periods until payment

Discount rate (r)

Periods

(n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

________________________________________________________________________________

1

2

3

4

5

0.990

0.980

0.971

0.961

0.951

0.980

0.961

0.942

0.924

0.906

0.971

0.943

0.915

0.888

0.863

0.962

0.925

0.889

0.855

0.822

0.952

0.907

0.864

0.823

0.784

0.943

0.890

0.840

0.792

0.747

0.935

0.873

0.816

0.763

0.713

0.926

0.857

0.794

0.735

0.681

0.917

0.842

0.772

0.708

0.650

0.909

0.826

0.751

0.683

0.621

1

2

3

4

5

6

7

8

9

10

0.942

0.933

0.923

0.914

0.905

0.888

0.871

0.853

0.837

0.820

0.837

0.813

0.789

0.766

0.744

0.790

0.760

0.731

0.703

0.676

0.746

0.711

0.677

0.645

0.614

0.705

0.665

0.627

0.592

0.558

0.666

0.623

0.582

0.544

0.508

0.630

0.583

0.540

0.500

0.463

0.596

0.547

0.502

0.460

0.422

0.564

6

0.513

7

0.467

8

0.424

9

0.386 10

11 0.896

0.804

0.722

0.650

0.585

0.527

0.475

0.429

0.388

0.350 11

12 0.887

0.788

0.701

0.625

0.557

0.497

0.444

0.397

0.356

0.319 12

13 0.879

0.773

0.681

0.601

0.530

0.469

0.415

0.368

0.326

0.290 13

14 0.870

0.758

0.661

0.577

0.505

0.442

0.388

0.340

0.299

0.263 14

15 0.861

0.743

0.642

0.555

0.481

0.417

0.362

0.315

0.275

0.239 15

________________________________________________________________________________

(n) 11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

________________________________________________________________________________

1

2

3

4

5

0.901

0.812

0.731

0.659

0.593

0.893

0.797

0.712

0.636

0.567

0.885

0.783

0.693

0.613

0.543

0.877

0.769

0.675

0.592

0.519

0.870

0.756

0.658

0.572

0.497

0.862

0.743

0.641

0.552

0.476

0.855

0.731

0.624

0.534

0.456

0.847

0.718

0.609

0.516

0.437

0.840

0.706

0.593

0.499

0.419

0.833

0.694

0.579

0.482

0.402

6

7

8

9

10

0.535

0.482

0.434

0.391

0.352

0.507

0.452

0.404

0.361

0.322

0.480

0.425

0.376

0.333

0.295

0.456

0.400

0.351

0.308

0.270

0.432

0.376

0.327

0.284

0.247

0.410

0.354

0.305

0.263

0.227

0.390

0.333

0.285

0.243

0.208

0.370

0.314

0.266

0.225

0.191

0.352

0.296

0.249

0.209

0.176

0.335

6

0.279

7

0.233

8

0.194

9

0.162 10

11

12

13

14

15

0.317

0.286

0.258

0.232

0.209

0.287

0.257

0.229

0.205

0.183

0.261

0.231

0.204

0.181

0.160

0.237

0.208

0.182

0.160

0.140

0.215

0.187

0.163

0.141

0.123

0.195

0.168

0.145

0.125

0.108

0.178

0.152

0.130

0.111

0.095

0.162

0.137

0.116

0.099

0.084

0.148

0.124

0.104

0.088

0.074

0.135

0.112

0.093

0.078

0.065

www.studyinteractive.org

1

2

3

4

5

11

12

13

14

15

Annuity Table

Present value of an annuity of 1 i.e.

Where

1 - (1 + r)-n

r

r = discount rate

n = number of periods

Discount rate (r)

Periods

(n)

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

________________________________________________________________________________

1

2

3

4

5

0.990

1.970

2.941

3.902

4.853

0.980

1.942

2.884

3.808

4.713

0.971

1.913

2.829

3.717

4.580

0.962

1.886

2.775

3.630

4.452

0.952

1.859

2.723

3.546

4.329

0.943

1.833

2.673

3.465

4.212

0.935

1.808

2.624

3.387

4.100

0.926

1.783

2.577

3.312

3.993

0.917

1.759

2.531

3.240

3.890

0.909

1.736

2.487

3.170

3.791

1

2

3

4

5

6

7

8

9

10

5.795

6.728

7.652

8.566

9.471

5.601

6.472

7.325

8.162

8.983

5.417

6.230

7.020

7.786

8.530

5.242

6.002

6.733

7.435

8.111

5.076

5.786

6.463

7.108

7.722

4.917

5.582

6.210

6.802

7.360

4.767

5.389

5.971

6.515

7.024

4.623

5.206

5.747

6.247

6.710

4.486

5.033

5.535

5.995

6.418

4.355

6

4.868

7

5.335

8

5.759

9

6.145 10

11 10.37

9.787

9.253

8.760

8.306

7.887

7.499

7.139

6.805

6.495 11

12 11.26

10.58

9.954

9.385

8.863

8.384

7.943

7.536

7.161

6.814 12

13 12.13

11.35

10.63

9.986

9.394

8.853

8.358

7.904

7.487

7.103 13

14 13.00

12.11

11.30

10.56

9.899

9.295

8.745

8.244

7.786

7.367 14

15 13.87

12.85

11.94

11.12

10.38

9.712

9.108

8.559

8.061

7.606 15

________________________________________________________________________________

(n) 11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

________________________________________________________________________________

1

2

3

4

5

0.901

1.713

2.444

3.102

3.696

0.893

1.690

2.402

3.037

3.605

0.885

1.668

2.361

2.974

3.517

0.877

1.647

2.322

2.914

3.433

0.870

1.626

2.283

2.855

3.352

0.862

1.605

2.246

2.798

3.274

0.855

1.585

2.210

2.743

3.199

0.847

1.566

2.174

2.690

3.127

0.840

1.547

2.140

2.639

3.058

0.833

1.528

2.106

2.589

2.991

6

7

8

9

10

4.231

4.712

5.146

5.537

5.889

4.111

4.564

4.968

5.328

5.650

3.998

4.423

4.799

5.132

5.426

3.889

4.288

4.639

4.946

5.216

3.784

4.160

4.487

4.772

5.019

3.685

4.039

4.344

4.607

4.833

3.589

3.922

4.207

4.451

4.659

3.498

3.812

4.078

4.303

4.494

3.410

3.706

3.954

4.163

4.339

3.326

6

3.605

7

3.837

8

4.031

9

4.192 10

11

12

13

14

15

6.207

6.492

6.750

6.982

7.191

5.938

6.194

6.424

6.628

6.811

5.687

5.918

6.122

6.302

6.462

5.453

5.660

5.842

6.002

6.142

5.234

5.421

5.583

5.724

5.847

5.029

5.197

5.342

5.468

5.575

4.836

4.988

5.118

5.229

5.324

4.656

4.793

4.910

5.008

5.092

4.486

4.611

4.715

4.802

4.876

4.327

4.439

4.533

4.611

4.675

10

www.studyinteractive.org

1

2

3

4

5

11

12

13

14

15

Chapter 1

Financial

management: an

introduction

www.studyinteractive.org

11

CHAPTER CONTENTS

WHAT IS FINANCIAL MANAGEMENT? --------------------------------- 13

12

13

15

17

STAKEHOLDERS

17

www.studyinteractive.org

The management of all matters associated with the cash flow of the organisation

both short and long-term.

MAXIMISE SHAREHOLDER WEALTH

What is shareholder wealth?

The share price multiplied by the total number of shares.

1.

2.

3.

P0 =

D0 (1+g)

Ke -g

Where:

P0 is

D0 is

g is

Ke is

www.studyinteractive.org

13

Example 1

CSI Co has just paid a dividend of 23 cents. General expectation is that dividends

will continue to grow at approximately 4% per annum. The risks perceived by the

shareholders of CSI Co lead them to require an annual return (ke) of 12%.

Required:

(a)

(b)

will expect a return of 15%. What impact does this have on the share

price from (a)?

(c)

higher growth (at 6% per annum) for the foreseeable future, what

impact will that have on the share price from (a)?

(d)

dividends of 4% were to stop with no guarantee of any future growth,

but that the dividend will remain constant at 23 cents, what would

happen to the share price?

14

www.studyinteractive.org

Financial management involves three main areas of decision making:

1.

1.

Capital assets.

2.

Working capital.

3.

Financial assets.

Capital assets

A critical decision because of the strategic implications of many investments.

Working capital

The decision on the level of inventory to hold and the level of credit given to

customers (receivables).

Financial assets

The company may have surplus cash to invest and should consider the following

factors when deciding how to invest that cash:

1.

Risk.

2.

Return.

3.

Liquidity.

2.

When looking at the financing of a business there are 4 basic questions to consider:

1.

2.

3.

debt or equity,

4.

www.studyinteractive.org

15

3.

The amount of return to be paid in cash to shareholders. The level of dividend paid

will be determined by: profits; available cash; and investment opportunities

requiring funding.

Possible dividend policies:

The company pays out the same dividend each year (this may be adjusted for

inflation).

The company pays out the same proportion of available earnings each year.

The company pays out any remaining earnings after all

opportunities increasing shareholder wealth have been financed.

investment

The theory states that shareholders can create a cash dividend if they so

require, or use dividends to purchase more shares if they wish to increase

their capital wealth.

Interrelationship of decisions

Dividend

Decision

Investment

Decision

Long- or short-term

Debt or Equity

Distribute or Retain?

cash give an

adequate return to

investors?

With an attractive

investment

opportunity, where

will funds come from?

Retained earnings

provide a cheap

source of equity

finance.

The financing decision will dictate the

return required by investors.

These organisations are established to provide services to the community. Such

organisations need funds to finance their operations. The major constraint is the

amount of funds that they would be able to raise. Not-for-profit organisations seek

to use the limited funds to obtain value for money.

16

www.studyinteractive.org

Value for money means getting the best possible service at the least possible cost.

Economy

to produce the service. The aim is to acquire the necessary input

at the lowest possible cost.

Effectiveness means doing the right thing. It measures the extent to which the

service meets its declared objectives.

Efficiency

means doing the right thing well. It relates to the level of output

generated by a given input. Reducing the input:output ratio is an

indication of increased efficiency.

The service will be economic if it is able to minimise the cost of weekly collection

and not suffer from wasted use of resources.

The service will be effective if it meet its target of weekly collection.

The service will be efficient if it is able to raise the number of collection per vehicle

per week.

Stakeholders

Stakeholders are any party that has both an interest in and relationship with the

company. The responsibility of an organisation is to balance the requirements of all

stakeholder groups in relation to the relative economic power of each group.

The very nature of looking at stakeholders is that the level of return is finite within

an organisation. There is a need to balance the needs of all groups in relation to

their relative strength.

Agency theory

Principal

Agent

The principal is the shareholder, owning the company. The principals objective is

to increase wealth through income, capital growth and risk management.

The principals appoint directors as their agents to carry out the day-to-day

business of the company. The directors goals are likely to be to maximise their

own remuneration.

www.studyinteractive.org

17

Goal congruence

For an organisation to function properly, it is essential to achieve goal congruence

at all levels. All the components of the organisation should have the same overall

objectives, and act cohesively in pursuit of those objectives.

In order to achieve goal congruence, there should be carefully designed incentives

for managers and the workforce which would motivate them to take decisions which

will be consistent with the objectives of the shareholders.

Maximising profits

Within organisations it is normal to reward management on some measure of profit.

We would expect a close relationship between profit and shareholders wealth.

There are, however, ways in which they may conflict such as:

1.

Short-termism.

2.

Cash vs accruals.

3.

Risk.

Short-termism

A profit target is normally calculated over one year; it is relatively easy to

manipulate profit over that period to enhance rewards at the expense of future

years.

Cash vs accruals

As we will see later, wealth is calculated on a cash basis and ignores accruals.

Risk

A manager may be inclined to accept very risky projects in order to achieve profit

targets which in turn would adversely affect the value of the business.

18

www.studyinteractive.org

Chapter 2

Fundamental financial

mathematics

www.studyinteractive.org

19

CHAPTER CONTENTS

COMPOUNDING & GROWTH -------------------------------------------- 21

INTEREST

21

INFLATION

21

DISCOUNTING ----------------------------------------------------------- 22

ANNUITIES AND PERPETUITIES --------------------------------------- 25

20

ANNUITIES

25

PERPETUITIES

26

www.studyinteractive.org

An initial monetary value (PV) will grow at a rate (r) which is constant each time

period (often one year) for a number of periods (n).

A compounding or growth calculation will give us the end value in the future (FV).

FV = PV(1 + r)n

(r is the decimal form of the interest or inflation rate in question).

Interest

Growth could be due to the PV being invested in an interest-bearing account.

Example 1

Terry Co has $10,000 to invest for 4 years and can put it in an account that will

earn 5% each year.

Required:

Calculate the balance available to Terry Co after 4 years.

Inflation

Prices and/or costs may grow from year to year due to inflation.

Example 2

FLT Co is currently paying $12 per unit to produce a product which is then sold for

$30 per unit.

The cost is expected to rise by 6% per annum due to inflation whilst the sales price

is expected to rise by 4.5% each year.

Required:

Calculate the price, cost and contribution per unit for FLT Cos product for

each of the next four years.

Year

Price ($30)

Cost ($12)

Contribution

www.studyinteractive.org

21

DISCOUNTING

When a required or expected future value (FV) at a certain time (after n periods) is

known, we use a discounting calculation to find the amount that ought to be

invested now (PV), earning a certain rate (r) each period (for n periods).

Example 3

Terry Co expects to make a payment of $12,155 in 4 years time and can put

money in an account now that will earn 5% each year.

Required:

Calculate the maximum that Terry needs to invest now.

Formula

PV = FV(1 + r)-n

All terms as for compounding.

Example 4

Terry Co is able to earn 5%. How much should be invested now in order to receive

a sum of $360,000 after 2 years and a further $280,000 after 5 years?

Year (n)

FV

2

360,000

5

280,000

(1 + r)-n

Present Value

Tables given in the exam show the values of (1 + r)-n for whole number values of r

between 1% and 20% and for time periods until cash flow of 1 to 15.

Time value

In examples 1 and 3, Terry Co will be indifferent between a sum of $10,000 now

and a sum of $12,155 after 4 years. Although the absolute figures are different,

they have the same value to Terry Co due to the time value of money.

22

www.studyinteractive.org

Cost of capital

The cost of capital is the return that an investor expects from a particular type of

investment. It is stated as a percentage amount and reflects the risk that the

investment carries.

Annuities

An annuity is a cash flow where the same amount is received or paid each time

period for a set number of periods.

Instead of multiplying each cash flow by its present value factor (PVF), the PVFs

can be added together and the sum multiplied by a single value of the annuity.

Example 5

Terry Co expects to receive a payment of $40,000 next year and for the following 4

years. Terry has a cost of capital of 5%.

Required:

Calculate the present value of the annuity:

(i)

(ii)

Year

FV

40,000

40,000

40,000

40,000

40,000

PVF

Present Value

www.studyinteractive.org

23

Annuity factors

A table given in the exam gives the present value factors for annuities when the

cost of capital is r% and the annuity, starting after one year, runs for up to 15

years.

Example 6

An investment is expected to yield constant income of $12,500 each year for the

next 12 years, with the first of these cash flows expected to arise in one years

time.

Required:

(i)

Calculate the present value of the annuity with a cost of capital is 8%.

(ii)

invest $90,000 to earn the 12 year annuity of $12,500.

24

www.studyinteractive.org

Annuities

Discounting annuities is made easier by having a table of annuity factors.

Annuity factors discount cash flows to a value one time period before the first

payment arises.

Time

Fina

$A

$A

$A

$A

$A

ncin

g

Dec

x Annuity Factor

isio $ VALUE

n

If the first cash flow is at time 1, the annuity factor places the value at time 0 our

present value.

If the first cash flow arises later, say time 4, the value is places at time 3 and a

further discounting adjustment is required to get a present value.

Example 7

AGA Co is considering an investment with cash returns expected to be $100,000

each year for 4 years at a discount rate of 10%.

Required:

Calculate the present value of these cash flows:

(a)

(b)

i.

Year 4,

ii.

Year 0.

Time

Time

Time

www.studyinteractive.org

25

Perpetuities

A form of annuity that arises forever (in perpetuity).

In this situation the calculation of the present value of the future cash flows is:

Present value of the perpetuity

Interest rate

Example 8

Reecer Co expects to receive $18,000 each year in perpetuity.

discount rate is 9%.

The current

Required:

1.

2.

26

www.studyinteractive.org

Chapter 3

Capital budgeting

www.studyinteractive.org

27

CHAPTER CONTENTS

CAPITAL BUDGETING --------------------------------------------------- 29

28

29

31

WORKING CAPITAL

31

PRO FORMA

32

34

35

37

www.studyinteractive.org

CAPITAL BUDGETING

A form of decision-making where the investment occurs in the near future and the

benefits of the investment occur over a longer time, usually a number of years.

We shall use the following example to illustrate capital budgeting.

You should remember from F5 that the only costs and revenues considered in our

decision should be relevant, fitting the 3 criteria:

FUTURE

CASH FLOW

www.studyinteractive.org

29

Future

Only elements of cost and revenue that are yet to arise should be included in any

investment decision.

Costs that have already been incurred (or committed to) are SUNK COSTS and

should be excluded.

Cash flows

Investment decision making should only consider cash costs and revenues. Noncash items such as depreciation, amortisation, absorption or apportionment of costs

should be ignored and replaced with the related cash amounts (if any):

Incremental

Investment decision making will only consider costs that change as a direct result

of the decision under review.

Costs that will be incurred regardless are identified as COMMITTED COSTS and will

be excluded such as:

being considered.

Opportunity cost

As well as cash flows which our proposal gives rise to, we ought to consider any

other cash flows affected by our decision, such as reduced output and sales of other

lines of production due to us using a scarce resource.

30

www.studyinteractive.org

If a proposal earns profits, then our company will be due to pay tax on those

profits. The tax payments have to be included as relevant costs.

Questions will give (simplified) tax rules for the scenario in question; the workings

will be straightforward:

If there is a net operating profit in one year, there will be a cash payment

due.

If there is a net operation loss in one year, there will be a reduction in overall

tax paid by the company, showing as a cash benefit relevant to our

investment.

Workings:

calculate the net relevant operating cash flow for each year

input the result to the indicated year (either a one year delay or in the year of

the cash flow) as a negative figure for profits; a positive figure for losses.

Investment in capital gives rise to tax allowable depreciation. Over the life of an

asset, the total cash benefit of this is: (Investment residual value) x tax rate%

The initial cash benefit is always: (Investment x Allowance rate x Tax rate)

Allowances over the life will be either straight line (all the same) or reducing

balance (each year is a fixed % lower than the previous).

There will be a final balancing adjustment so that the allowances given equal the

total amount expected.

Working capital

When a company holds inventory and makes sales on credit, it has to provide

additional finance so that operating costs may be paid.

This finance is not an expense so has no tax consequence.

It is likely that the amount invested each year will change. The relevant cash flow

is the change in balance from year to year.

All amounts invested throughout a project will be recovered at the end of the

project.

www.studyinteractive.org

31

Pro forma

Pro-forma (assuming tax paid one year after profits)

1

$

final

$

(X)

(X)

(X)

(X)

(X)

Final + 1

$

Operating Cash-flows

Inflows

Outflows

Taxation

Scrap Proceeds

Capital Allowances

Working Capital

Present Value Factors

Present Value

32

(X)

X/(X)

(X)

(X)

(X)

0.xxx

0.xxx

0.xxx

0.xxx

(X)

Less investment

(capital and working capital)

Net Present Value

(X)

X

www.studyinteractive.org

Example 1

Put the relevant cash flows for Rainer Co into the pro-forma below.

Time

1

$

2

$

3

$

4

$

5

$

Operating Cash-flows

Inflows

Outflows

Taxation

Scrap Proceeds

Capital Allowances

Working Capital

Present Value Factors

Present Value

Less investment

(capital and working capital)

www.studyinteractive.org

33

Decision criterion

The cumulative present value of future cash flows is the maximum that the

company would be prepared to invest in the project; the value to investors of the

project.

If the amount required for investment is lower than the value, then accepting the

project will increase the shareholders wealth.

Thus, if the NPV is positive, the investment should be made.

Advantages

1.

2.

3.

4.

Can be flexible with different timings of cash flow & different risk for different

projects.

Disadvantage

1.

34

www.studyinteractive.org

The rate of return at which the NPV equals zero.

Example 2

The net cash flows of Rainer Cos investment above, discounted at 10% yield a net

present value of $69,000.

Required:

Estimate, on the graph below, the rate at which the NPV would be $NIL.

Time

Operating cash flows

PVF @

1

$000

2

$000

3

$000

4

$000

5

$000

167

212

217

202

PV

Cumulative

Initial investment (non-current assets plus working capital)

$560

NPV

000

69

10%

www.studyinteractive.org

r%

35

Linear interpolation

We can estimate the IRR by linear interpolation. This uses the following formula.

Interpolated IRR

NL

L

NL - NH

(H - L)

Where:

L

NL

NH

Example 3

The net cash flows of Rainer Cos investment above, discounted at 10% yield a net

present value of $69,000. At 18%, the corresponding figure is -$29,000.

Required:

Estimate, using the formula, the IRR of the project.

The IRR can be estimated using any pair of costs of capital. Each pair will give a

slightly different result. Exam marks are awarded for the technique rather than

precisely matching the solution given in the answers. In the Rainer Co example, a

second guess of 15% would give an IRR of 15.3%; a second guess of 20% would

have given 15.8%, and a second guess of 5% would have given an IRR of 14.5%

Decision criterion

If the IRR is greater than the estimated cost of capital, it is assumed that the

project has a positive NPV so should be accepted.

36

www.studyinteractive.org

Advantages

1.

Like the NPV method, IRR recognises the time value of money.

2.

3.

IRR can be used in cases where it is not possible to calculate an accurate cost

of capital but only a reasonable estimate can be given. IRR gives a breakeven

figure and, so, a margin of safety for the estimate.

Disadvantages

1.

2.

3.

If a project has irregular cash flows there is more than one IRR for that

project (multiple IRRs).

Single investment decision

A single project will be accepted if it has a positive NPV at the required rate of

return. If it has a positive NPV then, it will have an IRR that is greater than the

required rate of return.

Two projects are mutually exclusive if only one of the projects can be undertaken.

In this circumstance the NPV and IRR may give conflicting recommendation.

The reasons for the differences in ranking are:

1.

viability.

2.

on different assumptions about the rate at which funds generated by the

project are reinvested. NPV assumes reinvestment at the companys cost of

capital, IRR assumes reinvestment at the IRR.

www.studyinteractive.org

37

38

www.studyinteractive.org

Chapter 4

Investment appraisal

techniques

www.studyinteractive.org

39

CHAPTER CONTENTS

INFLATION AND D.C.F. -------------------------------------------------- 41

THE FISHER EFFECT

41

EQUIVALENT ANNUAL COST (EAC)

43

HARD CAPITAL RATIONING

45

45

46

48

UNCERTAINTY ----------------------------------------------------------- 49

SENSITIVITY ANALYSIS

49

EXPECTED VALUES

50

51

PAYBACK

51

ROCE - ARR --------------------------------------------------------------- 53

40

www.studyinteractive.org

There two ways of dealing with inflation:

1.

2.

Include inflation

(money analysis)

Exclude inflation

(real analysis)

given

Discount with

Discount with

Exam tip

Must use where there is more than one

inflation rate in the question

Exam tip

Can use where a single inflation rate is

given for an easier computation

arrears

constant over a long period of time

(an annuity excluding inflation)

depreciation

The relationship between real and money interest is given in the formula sheet:

(1 + i) = (1 + r)(1 + h)

It is easier to remember as:

(1 + m) = (1 + r) (1 + i)

or

Where

r

=

m

=

i

=

money (or nominal) discount rate

inflation rate

Example 1

r = 8%

i = 5%

Required:

Calculate the money rate.

www.studyinteractive.org

41

Example 2

m = 12.3%

i = 4%

Required:

Calculate the real rate of return.

Example 3

A company has to invest $450,000 in a project. The investment will result in new

product sales of 6,000 units each year for 3 years. There will be no residual value

for equipment used.

The selling price of the new product is $50 per unit and the incremental costs of

sale are $15 per unit, both in current terms.

The companys WACC is 12% and inflation is expected to be 3.6%

Required:

Calculate the NPV using both the money and real analyses.

42

www.studyinteractive.org

ASSET REPLACEMENT

The decision is how to replace an asset, not whether. We aim to adopt the most

cost effective replacement strategy. The comparison may be complicated by having

different asset life cycles for different options.

Key ideas/assumptions:

1.

Cash inflows from trading (revenues) are not normally considered in this type

of question. The assumption being that they will be similar regardless of the

replacement decision.

2.

with machines of differing ages.

3.

future.

Options with different life cycles are compared by calculating the EAC. It is a

hypothetical payment which, if made annually, would result in the same PV of costs

as the option being considered.

If all options have an EAC, a direct comparison may be made and the least costly

found.

Formula

EAC = PV of assets costs Annuity factor for asset life

www.studyinteractive.org

43

Step 1

Establish the present value of costs of each option.

Year

8% PVF

0.926

0.857

0.794

0.735

0.681

5,000

5,000

5,000

7,000

11,000

n/a

n/a

18,000

14,000

6,000

PV

Resale Value at year end

PV

Step 2

Use the equivalent annual cost formula & look for the lower amount.

44

www.studyinteractive.org

CAPITAL RATIONING

A limit on the level of funding available to a business.

There are two types:

Externally imposed by banks and capital markets, due to:

1.

2.

No track record

Capital budgeting limits are internally imposed by senior management. This is

contrary to the rational aim of a business which is to maximise shareholders wealth

(ie to take all projects with a positive NPV).

Reasons:

1.

2.

3.

4.

www.studyinteractive.org

45

There is a shortage of funds in the present period which will not arise in following

periods. Note that the rationing in this situation is very similar to the limiting factor

decision that we know from decision making. In that situation we maximise the

contribution per unit of limiting factor.

Example 7

The funds available for investment are $250,000. All investments must be started

immediately.

Project

Initial investment

NPV

$000s

$000s

A

100

25

B

200

35

C

80

21

D

75

10

Required:

Identify the investment plan which will maximise the value of the

company.

Scenario 1: divisibility

ie each project can be taken in part and the returns (NPV) will be proportionate to

the amount of investment.

Key working: Profitability index (P.I.)

P.I. =

Project

Working

NPV Investment

P.I.

Ranking

A

B

C

D

Funds available

46

Projects undertaken

NPV earned

www.studyinteractive.org

The projects are taken as a whole or not at all.

Key

We identify all possible mixes and establish which mix generates the maximum

NPV.

Example 7

Required:

Identify the investment plan to maximise the return to the company

assuming the projects are non-divisible.

www.studyinteractive.org

47

A more complex environment where there is a shortage of funds in more than one

period. This makes the analysis more complicated because we have multiple

constraints and multiple outputs. Linear programming would have to be employed.

Example 8

Horge Co is reviewing investment proposals that have been submitted by divisional

managers. The investment funds of the company are limited to $800,000 in the

current year. Details of three possible investments, none of which can be delayed,

are given below.

Project 1

An investment of $300,000 in work station assessments. Each assessment would

be on an individual employee basis and would lead to savings in labour costs from

increased efficiency and from reduced absenteeism due to work-related illness.

Savings in labour costs from these assessments in money terms are expected to be

as follows:

Year

Cash flows ($'000)

1

85

2

90

3

95

4

100

5

95

Project 2

An investment of $450,000 in individual workstations for staff that is expected to

reduce administration costs by $140,800 per annum in money terms for the next

five years.

Project 3

An investment of $400,000 in new ticket machines. Net cash savings of $120,000

per annum are expected in current price terms and these are expected to increase

by 3.6% per annum due to inflation during the five-year life of the machines.

Horge Co has a money cost of capital of 12% and taxation should be ignored.

Required:

Determine the best way for Horge Co to invest the available funds and

calculate the resultant NPV:

(a)

(b)

48

www.studyinteractive.org

UNCERTAINTY

Consideration of uncertainty is particularly important when performing investment

appraisal due to:

1.

Long timescale

2.

3.

4.

Techniques available:

1.

Sensitivity analysis

2.

Expected values

3.

4.

Payback.

Sensitivity analysis

A technique that considers a single variable at a time and identifies by how much

that variable has to change for the decision to change (from accept to reject).

Example 9

An initial investment of $50,000 is expected to give rise to the following cash flows

for each of years 1 to 3. The discount rate is 10%.

$ per annum

Fixed cost

65,000

30,000

120,000

Required:

(a)

(b)

Calculate by how much the values would have to change for the

decision to alter for:

(i)

(ii)

Key working

Sensitivity

Margin

www.studyinteractive.org

under consideration

49

Expected values

Where there is a range of possible outcomes which can be identified and a

probability distribution can be attached to those values. In this situation we may

establish some sort of average return. The expected value is the arithmetic mean

of the outcomes as expressed below:

EV = px

Where

x = the value of an outcome

Example 10

Toorongs Co is developing a new product, the Wryte which will be launched after

further significant investment in plant and machinery.

If Toorongs makes the Wryte, there are four possible levels of success which will

affect the sales volume; the length of the life cycle and the costs identified with the

investment.

The relevant cash flows of each outcome have been analysed, resulting in the

following NPV figures, along with associated probabilities estimated for each

outcome.

Outcome

NPV ($000)

Probability

1,250

0.12

Moderate success

650

0.30

Marginal success

320

0.25

(750)

0.33

Strong success

Failure

Working (px)

Required:

(a)

(b)

values.

50

www.studyinteractive.org

If an individual investment or project is perceived to be more uncertain than

existing investments, the company could adjust the discount rate up to reflect the

additional risk. The problem in doing so is that any adjustment would be arbitrary.

Payback

The payback period is a measure of how long it takes the income of an investment

to cover the initial outlay. If we consider the payback period, we focus on the

earlier activities of the project, those where there is less uncertainty.

Example 11

The net cash flows of Rainer Cos investment in the last chapter are shown below.

Required:

Calculate the payback period of the project.

Time

Operating cash flows

1

$000

2

$000

3

$000

4

$000

5

$000

167

212

217

202

Cumulative

Initial investment (non-current assets plus working capital)

$560

One criticism of payback is that it doesnt consider time value of money; the cash

flows in year 3 are given the same weighting as those in year 1. It is possible to

modify the working to arrive at a discounted payback period.

Example 12

Required:

Calculate the discounted payback period for Rainers investment project.

Time

Operating cash flows

PVF @ 10%

PV

1

$000

2

$000

3

$000

4

$000

5

$000

167

212

217

202

0.909

0.826

0.751

0.683

0.621

152

175

163

138

Cumulative

Initial investment (non-current assets plus working capital)

www.studyinteractive.org

$560

51

A specific decision that compares two specific financing options, the use of a finance

lease or buying outright financing via a bank loan.

Key information

1.

The rate is given by the rate on the bank loan in the question, if it is pre-tax

then the rate must be adjusted for tax. If the loan rate was 10% pre-tax and

corporation tax is 30% then the after-tax rate would be 7%. (10% x (1 0.3)

2.

Cash flows

Purchase

1/ Cost of the investment

Lease

1/ Lease rental

- in advance

- annuity

3/ Residual value

Example 13

Smitcher Co is considering how to finance a new project that has been accepted by

its investment appraisal process.

For the four year life of the project the company can either arrange a bank loan at

an interest rate of 15% before corporation tax relief. The loan is for $100,000 and

would be taken out immediately. The residual value of the equipment is $10,000 at

the end of the fourth year.

An alternative would be to lease the equipment over four years at a rental of

$30,000 per annum payable in advance.

Tax is payable at 33% one year in arrears. Capital allowances are available at 25%

on the written down value of the asset.

Required:

Calculate whether it is financially cheaper to buy or lease the equipment.

1.

Who receives the residual value in the lease agreement? It is possible that

the residual value may be received wholly by the lessor or almost completely

by the lessee.

2.

The agreements tend to be much more restrictive than bank loans.

3.

Are there any additional benefits associated with lease agreement? Many

lease agreements will include within the payments some measure of

maintenance or other support services.

52

www.studyinteractive.org

ROCE - ARR

One final approach to capital investment decision making is to calculate and

consider the average return on capital employed (ROCE) or accounting rate of

return (ARR) that the proposal will generate over its life.

Advantages

1.

Provides a measure that is consistent with one measure that may be applied

by company analysts and so may be more widely understood by less well

financially aware observers.

Disadvantages

1.

money.

2.

As a percentage (relative measure), ARR does not indicate the size of the

investment.

3.

4.

Unlike NPV or IRR, which have risk-based target figures, there is no reliable

way of finding a target ARR.

Example 14

The net operating profit after tax for Rainer Cos investment in the last chapter is

calculated below (note no tax delay shown). The initial capital investment would be

$515,000 with a residual value of $70,000 after 4 years.

Required:

Calculate the accounting rate of return of the project.

Time

1

$000

2

$000

3

$000

4

$000

180

229

234

142

Corporation tax

54

69

70

43

39

29

22

44

165

189

186

143

Operating contribution

ARR =

www.studyinteractive.org

53

54

www.studyinteractive.org

Chapter 5

finance

www.studyinteractive.org

55

CHAPTER CONTENTS

EQUITY ------------------------------------------------------------------- 57

ORDINARY SHARES

57

PREFERENCE SHARES

57

DEBT ---------------------------------------------------------------------- 58

SECURITY

58

TYPES OF DEBT

58

59

ISLAMIC FINANCE ------------------------------------------------------- 61

WHAT IS ISLAMIC FINANCE?

56

61

www.studyinteractive.org

EQUITY

Equity relates to the ownership rights in a business.

Ordinary shares

1.

2.

3.

Permanent financing.

1.

2.

3.

them more attractive and, therefore, more valuable, than unlisted companies.

1.

Issuing equity finance can be expensive in the case of a public issue (see

later).

2.

Carries a higher cost than loan finance, both for risk and for giving no tax

relief.

3.

4.

A high proportion of equity can increase the overall cost of capital for the

company. (Chapter 4).

Preference shares

1.

Fixed dividend.

2.

3.

www.studyinteractive.org

57

DEBT

The loan of funds to a business without any ownership rights.

1.

2.

Security

Charges

The debt holder will normally require some form of security against which the funds

are advanced. This means that in the event of default the lender will be able to

take assets in exchange of the amounts owing.

Covenants

A further means of limiting the risk to the lender is to restrict the actions of the

directors through the means of covenants. These are specific requirements or

limitations laid down as a condition of taking on debt financing. They may include:

1.

Dividend restrictions.

2.

Financial ratios.

3.

Financial reports.

4.

Types of debt

Debt may be raised from two general sources, banks or investors.

Bank finance

For companies that are unlisted and for many listed companies the first port of call

for borrowing money would be the banks. These could be the high street banks or

more likely for larger companies the large number of merchant banks concentrating

on securitised lending.

This is a confidential agreement that is by negotiation between both parties.

Traded investments

Debt instruments sold by the company, through a broker, to investors.

features may include:

Typical

1.

The debt is denominated in units of $100, this is called the nominal or par

value.

2.

3.

The debt has a lower risk than ordinary shares. It may be protected by the

charges and covenants.

58

www.studyinteractive.org

They include:

Debentures

Debt secured with a charge against assets (either fixed or floating), low risk debt

offering the lowest return of commercially issued debt.

Unsecured loans

No security meaning the debt is more risky requiring a higher return.

Mezzanine finance

High risk finance raised by companies with limited or no track record and for which

no other source of debt finance is available. A typical use is to fund a management

buy-out.

www.studyinteractive.org

59

OTHER SOURCES

Sale and leaseback

1.

Selling good quality fixed assets such as high street buildings and leasing

them back over many (25+) years.

2.

3.

Grants

1.

Often related to regional assistance, job creation or for high tech companies.

2.

3.

Retained earnings

The single most important source of finance, for most businesses the use of

retained earnings is the core basis of their funding.

Warrants

1.

specified (exercise) price.

2.

The warrant offers a potential capital gain where the share price may rise

above the exercise price.

3.

Warrants are issued (granted) with the debt to make lending more

attractive.

Warrants can be separated from the debt and sold by the lender to raise

cash prior to maturity of the loan stock.

If the share price performs well and warrants are exercised, it results in

a cash injection to the company often sufficient to repay the debt.

A debt instrument that may, at the option of the debt holder, be converted into

shares. The terms are determined when the debt is issued and lay down the rate of

conversion (debt:shares) and the date or range of dates at which conversion can

take place.

The convertible is offered to encourage investors to take up the debt instrument.

The conversion offers a possible capital gain (value of shares value of debt).

The difference with warrants is that the convertible debt holders are the ones who

take up the shares; since warrants are separable from loan stock, there could be

two different groups of investors involved.

60

www.studyinteractive.org

ISLAMIC FINANCE

What is Islamic finance?

A form of finance that specifically follows the teachings of the Quran.

The teachings of the Quran are the basis of Islamic Law or Sharia. Sharia Law is,

however, not codified and as such the application of both Sharia Law and, by

implication, Islamic Finance is open to more than one interpretation.

Prohibited activities

In Shariah Law there are some activities that are not allowed and as such must not

be provided by an Islamic financial institution, these include:

1.

Gambling (Maisir)

2.

3.

Riba

Interest in normal financing relates to the monetary unit and is based on the

principle of time value of money. Sharia Law does not allow for the earning of

interest on money. It considers the charging of interest to be usury or the

compensation without due consideration. This is called Riba and underpins

all aspects of Islamic financing.

Instead of interest a return may be charged against the underlying asset or

investment to which the finance is related. This is in the form of a

premium being paid for a deferred payment when compared to the

existing value.

There is a specific link between the charging of interest and the risk and

earnings of the underlying assets. Another way of describing it is as the

sharing of profits arising from an asset between lender and user of the

asset.

There are some specific types of finance that are deemed compliant and allow

Islamic finance to offer similar financial products to those offered in normal

financing, these include:

The sale price of goods is agreed to cover all costs and generate a profit

margin. The time value of money is incorporated in the costs. There is a

reassurance that the credit is based on trade and not simply a financing

transaction.

A profit sharing contract where one party provides capital and the other the

expertise to invest the capital and manage the activities. There is a preagreed ratio of profit share.

www.studyinteractive.org

61

Has more in common with a joint venture than an equity investment. All (or

most) investors will have an active role in managing the business.

Diminishing musharaka allows for business ownership to gradually be

transferred over a period of time to a single owner, in a similar way to

venture capitalists creating an exit strategy based upon sale of shares.

A bank makes an asset available to a customer for a fixed period in exchange

for a fixed price. At the end of the period, the customer often has the option

to pay a fixed price in return for transfer of ownership of the asset from the

bank.

62

www.studyinteractive.org

Chapter 6

Cost of capital

www.studyinteractive.org

63

CHAPTER CONTENTS

INTRODUCTION TO THE COST OF CAPITAL --------------------------- 65

COST OF EQUITY --------------------------------------------------------- 66

1

66

69

WACC WEIGHTED AVERAGE COST OF CAPITAL -------------------- 73

64

www.studyinteractive.org

Risk and return

Risk is the anticipated variability in income from an investment.

Different investments have different degrees of risk. The higher the risk, the higher

the return required to cover that risk. Importantly, this helps as a starting point to

the identification of a cost of capital.

It is likely that a companys total finance comes from a number of sources.

Initially, we will limit our studies to the two main sources of finance:

1.

Equity

Ordinary shareholders make an investment which carries with it all the risks of the

business.

The annual return to ordinary shareholders is in no way guaranteed or predictable

and, so, can be defined as risky.

2.

Debt

Banks and individuals make loans to a company with contractual terms for payment

of interest and repayment of the capital lent. The company is obliged to make any

such payments before being allowed to distribute earnings to shareholders.

The lender often insists on security; the right to seize specified assets should the

borrower default on the loan.

The contractual obligation plus any security make debt a far less risky form of

finance with a correspondingly lower required return from investors.

www.studyinteractive.org

65

COST OF EQUITY

This may be calculated in one of two ways:

1.

2.

In Chapter 1, we saw that shares may be valued by the market (all shareholders)

based upon future dividends and dividend growth.

P0 =

D0 (1+g)

Ke -g

If our company has a listed share price (P0) and we know what dividend and

dividend growth the shareholders are expecting (as financial managers, we have

told them this), then we can rearrange the formula to find the cost of equity (Ke)

that shareholders must have used to arrive at the share value.

Ke =

where

Note:

D0 (1+g)

P0

+g

D0 =

current dividend

P0

ex-div is the share price immediately after a dividend has been paid

cum-div is the price immediately before a dividend is paid

The difference between ex-div and cum-div is the value of the

dividend, D0

Example 1

Clarence Co has a share price of $4.00 and has recently paid out a dividend of 20

cents. Dividends are expected to grow at an annual rate of 5%.

Required:

Calculate the cost of equity.

66

www.studyinteractive.org

Example 2

Wendyhouse Co has a cum-dividend share price of 369 cents and due to pay out a

dividend of 36 cents per share. Dividends are expected to grow at an annual rate

of 4%.

Required:

Calculate the cost of equity.

Estimating Growth

There are 2 main methods of determining growth:

1

1

n

D

g = 0

D

n

where

Do

current dividend

Dn

Example 3

Sissossokoko Co paid a dividend of 20 cents per share 4 years ago, and the current

dividend is 33 cents. The current share price is $6 ex div.

Required:

(a)

(b)

Example 4

Masheranno Co paid a dividend of 6 cents per share 8 years ago, and the current

dividend is 11 cents. The current share price is $2.58 ex div.

Required:

Calculate the cost of equity.

www.studyinteractive.org

67

g = rb

where

Example 5

The ordinary shares of Tories Co are quoted at $5.00 cum div.

A dividend of 40 cents is just about to be paid.

The company has a return on capital employed of 12% and each year pays out

30% of its profits after tax as dividends.

Required:

Calculate the cost of equity.

68

www.studyinteractive.org

CAPM starts from having a measure of risk () to calculating the required return.

It is particularly useful where our company does not have listed shares and so we

dont have a P0 for the dividend valuation model.

E(ri) = Rf + i (E(rm) Rf)

Where:

E(ri)

is

Rf

is

is

E(rm) is

investments together)

Example 6

The market return is 15%. Cowt Co has a beta of 1.2 and the risk free return is

8%.

Required:

Calculate the cost of equity.

The difference between the average expected return from the market and the risk

free rate is referred to as the market risk premium.

Example 7

The risk-free rate of return is 6%.

The market risk premium is 8%.

The beta factor for Krauch Co is 0.8.

Required:

Calculate the expected annual return.

www.studyinteractive.org

69

There is only one approach to calculate the cost of debt. We cant call it dividend

valuation model since debt doesnt pay dividends but it follows the same principle

of: future cash flows related to current market value.

A distinction

1.

The Gross Debt Yield is the average annual return to lenders consisting of:

Interest (relative to the amount lent); and,

Capital return (if the amount repaid is different to the amount lent)

2.

The cost of debt is the cost to the company of making the payments to

lenders. It consists of interest and capital return (as above) but also:

tax relief that the company earns on interest payments

Notation

1.

2.

However, the cost of debt calculation is more complicated than this may suggest.

Workings

1.

Traded debt is always quoted in $100 nominal units or blocks. All workings

are done by reference to $100, regardless of the total amount borrowed.

2.

stated). This is known as the coupon rate. It is not the same as the cost of

debt.

3.

(i)

(ii)

(iii)

nominal).

i(1 - T)

P0

Kd =

where

70

interest paid

P0

www.studyinteractive.org

Example 8

The 10% irredeemable loan notes of Raffer Co are quoted at $120 ex int.

Corporation tax is payable at 30%.

Required:

Calculate the cost of debt.

The Kd for redeemable debt is found by trial and error to see what cost of capital

must have been used to arrive at P0.

The relevant cash flows would be:

Time

0

1 to n

n

Cash flow

Market value of the loan note

Annual interest payments, net of tax

Redemption value of loan

%

P0

i(1 - T)

RV

Example 9

Wornuck Co has 10% loan notes quoted at $102 ex interest redeemable in 5 years

time at par. Corporation tax is paid at 30%.

Required:

Calculate the cost of debt.

Time

Cash

1-5

I(1-T)

Redemption

P0

%amount

1st PVF

1st NPV

www.studyinteractive.org

1st PV

2nd PVF

2nd PV

2nd NPV

71

Technique

1.

7 columns

2.

Post tax interest as an annuity

Final redemption value

Current ex-interest market value

3.

4.

5.

Estimate where, between the two guesses, the NPV would be zero.

NPV

72

r%

www.studyinteractive.org

The weighted average cost of capital is the average of cost of the companys

finance (equity, loan notes, bank loans, and preference shares) weighted according

to the proportion each element bears to the total pool of funds.

WACC = e ke + d kd (1T)

Ve Vd

Ve Vd

Where:

ke

Ve

Vd

Example 10

The following information is in the statement of financial position of Barrows Co:

$000

9% bonds redeemable in seven years time

8,000

5,000

Retained Earnings

3,000

The ex-div share price of Barrows Co is $3.00. The 9% bonds are trading on an exinterest basis at $85.00 per $100 bond.

The cost of equity has already been calculated at 15% and the cost of debt is 7.6%.

Required:

Calculate the weighted average cost of capital.

www.studyinteractive.org

73

Using WACC

WACC can be used to evaluate the companys investment projects if the following

conditions apply:

1.

2.

(i)

The company will maintain its existing capital structure in the long run

(ie same financial risk);

(ii)

The project has the same degree of business risk as the company has

now.

A loan note with an option to convert the debt into shares at a future date with a

predetermined price. In this situation the holder of the debt has the option

therefore the redemption value is the greater of either:

1.

2.

Example 11

Doodeck Co has convertible loan notes in issue that may be redeemed at a 10%

premium to par value in 4 years. The coupon is 10% and the current market value

is $110.

Alternatively the loan notes may be converted at that date into 25 ordinary shares.

The current value of the shares is $4 and they are expected to appreciate in value

by 6% per annum.

The tax rate is 30%.

Required:

Calculate the cost of convertibles.

74

www.studyinteractive.org

Preference shares

A fixed rate charge to the company in the form of a dividend rather than in terms of

interest. Preference shares are normally treated as debt rather than equity but

they are not tax deductible. They can be treated using the dividend valuation

model with no growth:

Kp =

d

P0

Example 12

Mahan Cos 9% preference shares ($1) are currently trading at $1.4 ex-div.

Required:

Calculate the cost of the preference shares.

Non-tradable debt

Bank loans and other non-traded loans have a cost of debt equal to the coupon rate

adjusted for tax.

Kd

Interest rate x (1 T)

Example 13

Trory Co has a loan from the bank at 12% per annum. Corporation tax is charged

at 30%.

Required:

Calculate the cost of debt.

www.studyinteractive.org

75

value)

We could just use the technique outlined above but if the current market value and

the redemption value are the same instead the irredeemable debt formula can be

used.

Example 14

The 10% loan notes of Raffer Co are quoted at $120 ex int. Corporation tax is

payable at 30%. They will be redeemed at a premium of $20 over par in 4 years

time

Required:

What is the net of tax cost of debt using:

(a)

(b)

76

www.studyinteractive.org

Chapter 7

Capital structure:

financial risk

www.studyinteractive.org

77

CHAPTER CONTENTS

CAPITAL STRUCTURE AND THE COST OF CAPITAL ------------------- 79

GEARING THEORIES ----------------------------------------------------- 80

78

80

81

82

82

www.studyinteractive.org

WACC can only be used if the capital structure (financial risk) of a company

remains unchanged.

Two competing effects

Reduction in WACC

Increase in WACC

increases Ke, should lead to an increase

in WACC

Tax relief in interest paid

financing is borne by the shareholders

should lead to a fall in WACC

Financial risk

A shareholders earnings in any company are risky, depending on the nature of

business carried out by the company.

If the company adds debt to the capital structure, by borrowing, the earnings

available to shareholders become even more risky as the lenders will have a prior

charge (often fixed) over the companys earnings.

Illustration

1

12,000

All Equity

2

18,000

3

6,000

1

12,000

Interest

3,000

3,000

3,000

Taxable

12,000

18,000

6,000

9,000

15,000

3,000

Tax (30%)

3,600

5,400

1,800

2,700

4,500

1,200

PAT (Earnings)

8,400

12,600

4,200

6,300

10,500

1,800

x 1.50

x 0.33

x 1.67

x 0.17

Year

PBIT

Year-on-year

www.studyinteractive.org

Including Debt

2

3

18,000

6,000

79

GEARING THEORIES

The traditional view of capital structure

Cost of equity

At relatively low levels of gearing the increase in gearing will have relatively low

impact on Ke. As gearing rises the impact will increase Ke at an increasing rate.

Cost of debt

There is no impact on the cost of debt until the level of gearing is prohibitively high.

When this level is reached the cost of debt rises.

Ke

Cost

of

capital

WACC

Kd(1-T)

Gearing (D/E)

Key point

There is an optimal level of gearing at which the WACC is minimised.

Since company value is based on:

P0 =

D0 (1+g)

Ke -g

80

www.studyinteractive.org

The basis of this theory is that a company with debt in its capital structure will pay

out a higher total to investors than it would with only equity.

Illustration

1

12,000

All Equity

2

18,000

3

6,000

3,000

3,000

3,000

PAT (Earnings)

8,400

12,600

4,200

6,300

10,500

1,800

Total to Investors

8,400

12,600

4,200

9,300

13,500

4,800

Year

PBIT

Interest

Including Debt

1

2

3

12,000 18,000

6,000

With a higher return available, investors (debt and equity in total) would be

prepared to invest a higher amount, giving the geared company a higher total

value.

Since the operating cash flows and their growth are the same, the only difference

between the two has to be that the geared company has a lower cost of capital

(WACC).

Implication

As the level of gearing rises the overall WACC falls.

having the highest level of debt possible.

Cost

of

capital

Ke

WACC

Kd(1-t)

Gearing (D/D+E)

www.studyinteractive.org

81

It is rare to find firms who seek to have very high gearing. This is due to problems

such as:

bankruptcy

tax exhaustion

A reflection that funding of companies does not follow theoretical rules but instead

often follows the path of least resistance.

A suggested order is as follows:

1st

nd

82

retained earnings

bank debt

3rd

issue of equity.

www.studyinteractive.org

Chapter 8

adjusted discount rates

www.studyinteractive.org

83

CHAPTER CONTENTS

CAPM ---------------------------------------------------------------------- 85

LIMITATIONS OF USING CAPM

87

FINDING A BETA

87

84

89

QUESTION APPROACH

90

www.studyinteractive.org

CAPM

We need to understand the limitations of the Capital Asset Pricing Model and, to do

that, we need a good understanding of the three components of the formula.

This is an estimate of the future return from risk free investments, such as

government loan stocks.

Is it an amount that we can predict with any degree of certainty?

This is a best guess estimate of the return that all stocks and bonds will return to

investors in the future. If this is over-estimated, the resulting cost of capital would

be too high, possibly resulting in us rejecting worthwhile opportunities. If underestimated, we might accept investment opportunities which do not give sufficient

return to compensate investors for their risk.

Beta

A beta value is calculated using regression analysis of historical data plotting the

total return on a share over a 12 month period against the total return on the

whole market over the same period.

Total return on the share is calculated by looking that the change in share price and

the dividend as a percentage.

Example 1

From the following information about share in Carol Co, calculate the annual return

to June 2011 and the annual return to September 2011.

2010

Dividend (paid December)

2011

June

September

June

September

400

480

440

482

10 cents

15 cents

performance. However, it forms the basis of our calculation of beta.

www.studyinteractive.org

85

Calculating beta

You will not perform any calculations of beta from historical data but need to be

aware of one critical point.

Regression Analysis finds a straight line of best fit through pairs of data.

Return on

Share

x

x

x

x

x

Return on

Market

The slope of this line is the shares beta value, reflecting business and financial risk

relative to the average in the stock market.

The beta value ignores that most of the pairs of data lie some way off the line of

best fit. The difference between each x and the line of best fit is due to a specific

factor relating to that company at the specific time the data are gathered.

Unsystematic risk

These specific variations are known as the unsystematic risk of the share. In

using CAPM, we assume that shareholders are not affected by (or exposed to)

unsystematic risk.

Diversification

An investor can minimise his exposure to specific risk factors of an industry or a

particular company by spreading his wealth over a diverse range of stocks and

shares, creating a balanced and diversified portfolio of investments.

In a well-diversified portfolio, losses or poor returns on one share will be balanced

by better than expected returns on others. In other words, positive unsystematic

risk factors will be cancelled elsewhere by negative unsystematic risk factors.

An investor with a well-diversified portfolio can, therefore, ignore unsystematic risk

and concentrate on earning the returns indicated by CAPM, reflecting systematic

risk only.

86

www.studyinteractive.org

As well as calculating costs of capital using CAPM, questions will expect you to

explain the circumstances in which CAPM is appropriate.

1.

Using beta assumes that all shareholders invest in well diversified portfolios.

Whilst this may be the case for the majority of companies listed on major

stock exchanges, it is very unlikely to be the case for smaller, family-run

businesses.

2.

Any beta value calculated will be based on historic data which may not be

appropriate currently.

3.

The market return may change considerably over short periods of time.

4.

away risk. This is not necessarily the case meaning that some unsystematic

risk may remain.

Finding a beta

Questions will never expect you to calculate a beta from first principles. You will,

however, have to know where to look for the appropriate beta so that you can work

out the correct cost of capital. There are three main scenarios.

1.

Since it is quoted, it will have its own beta value.

Since it is staying in the same business area, the given beta value reflects the

risks of the new investment.

2.

The companys current beta does not reflect the business risk of the new

investment so should not be used.

We need to find the beta of a company in the same business sector as the

new activity a proxy company.

(We may need to adjust the proxy companys beta for financial risk

differences).

3.

An unlisted company

Since it has no listed share price, there will be no beta value for the company.

Therefore, we would always have to find a proxy company.

www.studyinteractive.org

87

Example 2

2shack Co is a listed company whose shares have a beta of 0.7 and a cost of capital

of 17% p.a. rf = 10% and rm = 20%.

A new project has arisen with an estimated beta of 1.3.

Required:

(a)

(b)

company?

88

www.studyinteractive.org

If we introduce debt financing, the level of risk will rise and hence the cost of equity

Ke will rise.

Risk

equity

Financial Risk

asset

this industry

Risk Free

debt = 0

Gearing (D/D+E)

A measure of risk incorporating both business risk and financial risk.

A measure solely of business risk. In a debt-free company, the equity beta would

be the asset beta. The asset beta will be the same for all companies in the same

industry.

Key formula

V (1 T)

e

d

a =

e +

d

(V

V

(1

T))

(V

e

d

e Vd(1 T))

www.studyinteractive.org

89

Question approach

1.

Equity beta

Identify a suitable equity beta we need a value from a company in the similar

industry. This beta will probably include gearing risk (if the company has any debt

finance).

2.

De-gear

Use the formula given to strip out the gearing risk to calculate the asset beta for

the project. The asset beta will be the same for all companies/ projects in a similar

industry.

3.

number of proxy asset betas. This way a better assessment of the level of

systematic risk suffered by the industry is calculated.

4.

Re-gear

Re-work the same formula to add back the unique gearing relating to the project.

5.

Use CAPM

Example 3

Foreignin Co is a wooden doll manufacturer with an equity:debt ratio of 5:3. The

corporate debt, which is risk free, has a gross redemption yield of 6%. The beta

value of the companys equity is 1.2. The average return on the stock market is

11%. The corporation tax rate is 30%.

The company is considering a games console project.

companies are currently operating in the gaming industry.

Company

Equity beta

1.05

1.10

1.18

Debt (%)

30

35

40

Equity (%)

70

65

60

Foreignin Co maintains its existing capital structure after the implementation of the

new project.

Required:

What would be a suitable cost of capital to apply to the project?

90

www.studyinteractive.org

Example 4

Tush-aq Co, an all equity agro-chemical firm, is about to diversify into the

consumer pharmaceutical industry. Its current equity beta is 0.8, whilst the

average equity of pharmaceutical firms is 1.3. Gearing in the pharmaceutical

industry averages 40% debt, 60% equity. Corporate debt is considered to be risk

free.

Rm = 10%, Rf = 4%, corporation tax rate = 30%.

Required:

What would be a suitable cost of equity for the new investment if Tush-aq

were to finance the new project in each of the following ways:

(a)

30% debt;

(b)

70% debt?

www.studyinteractive.org

91

92

www.studyinteractive.org

Chapter 9

Financial performance

measurement

www.studyinteractive.org

93

CHAPTER CONTENTS

PROFITABILITY RATIOS ------------------------------------------------ 95

RETURN ON CAPITAL EMPLOYED ROCE

95

95

GEARING ----------------------------------------------------------------- 97

COST

97

97

CAPITAL GEARING

99

INTEREST COVER

100

94

www.studyinteractive.org

PROFITABILITY RATIOS

The underlying short-term aim of a company.

There are two basic measures:

1.

2.

Return on Equity.

A measure of the underlying performance of the business before finance.

It considers the overall return before financing. It is not affected by gearing.

ROCE

Operating Profit

Capital employed

100

Operating profit

Also known as PBIT or profit before interest and tax.

Capital employed

The total funds invested in the business, it includes Equity and Long-term Debt.

A measure of return to the shareholders. It is calculated after taxation and before

dividends have been paid out. It will be affected by gearing.

ROE

Equity

100

Key working

$

PBIT

less Interest

PBT

Less Tax

PAT

Less Dividends

Retained Earnings

www.studyinteractive.org

()

()

()

95

Example 1

Case

A company is considering a number of funding options for a new project. The new

project may be funded by $20m of equity or debt. Below are the financial

statements given the project has been funded in either manner.

Statement of Financial Position extract

Equity Finance

Creditors

Debentures

$m

(10%)

Capital

Share Capital (50p)

Share Premium

Reserves

Debt Finance

$m

0.0

20.0

22.0

10.0

10.0

42.0

14.5

4.5

3.0

22.0

$m

Turnover

Gross Profit

less expenses

(excluding interest)

Operating Profit

200.0

40.0

(30.0)

10.0

Required:

Calculate profitability ratios and compare the financial performance of the

company under both equity and debt funding.

96

www.studyinteractive.org

GEARING

Should we finance the business using debt or equity?

There are two basic considerations:

1.

Cost.

2.

Risk.

Cost

Any finance will incur servicing costs, debt will require interest payments and equity

will require payment of dividends or at least capital growth. On the basis of cost of

servicing we would always pick debt over equity. Debt should be less expensive for

two reasons:

1.

Risk

The debt holder is in a less risky position than the shareholder. The lower risk is

due to two factors:

1.

Fixed terms A legal obligation to pay interest and repay debt on stated

dates.

2.

2.

Tax

Debt is tax deductible because the debt holders are not owners of the business.

Equity however will receive a return after tax because they receive an appropriation

of profits. Debt is therefore tax efficient.

Risk may be split into two elements:

1.

Business risk.

2.

Financial risk.

Business risk

Business risk is inherent to the business and relates to the environment in which

the business operates.

1.

Competition

2.

Market

3.

Legislation

4.

Economic conditions.

www.studyinteractive.org

97

If the company finances itself using debt as well as equity then it must generate

sufficient cash flow to pay interest payments as they fall due. The greater the level

of debt, the greater the interest payments falling due and the greater the volatility

of earnings available to shareholders. This is financial risk.

Gearing causes increased risk.

There are two areas of gearing:

1.

Operating gearing

Illustration

Year

Low Op Gearing

2

3

+50%

-67%

High Op Gearing

2

3

+50%

-67%

Year-on-year

Turnover

12,000

18,000

6,000

12,000

18,000

6,000

Variable Cost

6,000

9,000

3,000

1,000

1,500

500

Fixed Costs

1,000

1,000

1,000

6,000

6,000

6,000

PBIT

5,000

8,000

2,000

5,000

10,500

(500)

+60%

-75%

+110%

-105%

Year-on-year

The higher the fixed cost, the more volatile the profit before interest and tax. This

is one of the main indicators of business risk.

A financial manager does not aim to affect the cost structure; this is not one of our

3 key decisions. However you must be aware that the level of operating risk will

impact on the level of financial risk that a company is willing to take on.

2.

Financial gearing

Impact

A company can/must accept some level of risk, and is willing to trade additional risk

for additional gain. The effect of risk is cumulative: if a company already has high

operating gearing it will have to be more conservative with its financial gearing.

98

www.studyinteractive.org

The mix of debt to equity within a firms permanent capital.

There are two measures:

1.

2.

Capital gearing

The mix of debt to equity.

Gearing

Debt

Equity

100

100

Gearing

Debt

Debt + Equity

Debt

All permanent capital charging a fixed interest may be considered debt.

1.

2.

3.

Equity

1.

2.

share premium,

3.

reserves.

www.studyinteractive.org

99

Example 3

Statement of financial position extract for Wednap Co

$m

Bank overdraft

$m

5.0

9.0

3.0

Long-term liabilities

Debenture 10%

(8.0)

15.0

Capital

Ordinary share capital

Ordinary share premium

Preference share capital

Reserves

8.0

4.0

1.0

2.0

15.0

Required:

Calculate the financial gearing of the business using both methods.

Interest cover

An income statement measure that considers the ability of the business to cover

the interest payments as they fall due.

Interest cover

PBIT

Interest

Example 4

Stan Ltd statement of comprehensive income extract:

Operating Profit

Interest

Profit Before Tax

Tax @ 30%

Profit After Tax

$m

20.0

(4.5)

15.5

(4.65)

10.85

Required:

(a)

(b)

100

www.studyinteractive.org

www.studyinteractive.org

101

INVESTOR RATIOS

Assessing the financial position of the company using key information from the

financial statements.

Dividend cover/

dividend payout ratio

Earnings per

share/ PAT

DPS/ total

dividend

Price/ earnings

ratio

Dividend yield

Share price/

total MV

EPS

Number of ordinary shares in issue

Example 6

The Hoopia Co earned profits after tax of $14m.

shares in circulation.

Required:

Calculate the EPS for Hoopia.

102

www.studyinteractive.org

The P/E ratio is an indicator of future earnings growth expectations; it compares

the market value to the current earnings.

PE Ratio

EPS

Example 7

Dan

Steph

200c

80c

10c

8c

2c

8c

Number of shares

2 million

4 million

Share Price

EPS

Required:

Which company is seen to have a better future by the market?

The relationship between the dividend paid and the funds available to pay the

dividend, ie the attributable profit.

Dividend cover

Total dividends

Example 7 contd

Required:

Calculate the dividend payout ratio for each company.

www.studyinteractive.org

103

Dividend yield

Dividend yield =

Share price

Total dividends

Total market value

The cash return from holding a share. It is theoretically irrelevant because it only

considers part of the return available to the shareholder (the other part being the

capital gain or increase in share price).

Example 7 contd

Required:

Calculate each companys dividend yield.

A measure covering the two returns an investor will receive as a result of holding

the share, ie the dividend and the capital gain or loss.

TSR

Share price at the beginning of the year

Capital gain = current share price - share price at the beginning of the year.

Example 8

Turnover

EPS

DPS

Closing share price

Return on equity

2006

$7.2m

58.1c

24.3c

$7.25

11%

2007

$8.0m

60.2c

26.3c

$8.85

9%

2008

$7.9m

60.1c

27.6c

$7.34

Required:

Compare and contrast the financial performance of the company with the

expected return on equity.

104

www.studyinteractive.org

Chapter 10

www.studyinteractive.org

105

CHAPTER CONTENTS

RAISING EQUITY FINANCE -------------------------------------------- 107

UNLISTED COMPANIES

107

LISTED COMPANIES

107

RIGHTS ISSUES

106

109

www.studyinteractive.org

Unlisted companies

Fundamental issue

As an unlisted company it will be difficult to raise any equity finance. This is due to

the following reasons:

1.

2.

Marketability.

3.

1.

Own funds

2.

Retained earnings

3.

4.

Venture Capital

Exit strategy.

5.

Business Angels

6.

Private placing.

Listed companies

The methods of obtaining a listing are:

1.

It has the potential to raise the highest possible price for the company by being

offered to the widest possible market.

The problem is the cost associated with floatation which can be prohibitive.

Advantage: The widest market for shares is sought and hence the highest price

should be achieved.

2.

Investors are able to bid for shares and the shares are issued only to those

investors who have bid at the striking price or above.

Advantage: Useful where it is difficult for the company to assess the value of the

shares on the stock exchange.

www.studyinteractive.org

107

3.

Placing

Shares are placed with / sold to institutional investors, keeping the cost of the issue

to a minimum.

Advantage: Cheaper to issue shares.

4.

Shares are introduced to the exchange without any new shares being issued.

108

www.studyinteractive.org

A listed or quoted company is better able to raise equity finance.

Rights issues

A rights issue is the right of existing shareholders to subscribe to new share issues

in proportion to their existing holdings. This is to protect the ownership rights of

each investor.

Advantages

1.

Low cost

2.

3.

Rarely fail.

The new share price after the issue is known as the theoretical ex-rights price and

is calculated by finding the weighted average of the existing market price and the

issue price, weighted by the number of shares ex-rights.

Theoretical

=

ex-rights

price

rights issue

Number of shares (ex rights)

Value of a right

The new shares are issued at a discount to the existing market value, this gives the

rights some value.

Example 1

Marcus plc, which has an issued capital of 4,000,000 shares, having a current

market value of $2.80 each, makes a rights issue of one new share for every three

existing shares at a price of $2.00.

Required:

Calculate the theoretical ex-rights price and the value of each right.

www.studyinteractive.org

109

Shareholders options

The shareholders options with a rights issue are to:

1.

2.

3.

A bit of both

4.

Do nothing.

110

www.studyinteractive.org

Required:

(a)

Ignoring issue costs and any use that may be made of the funds

raised by the rights issue, calculate:

(i)

(ii)

(3 marks)

(b)

Tirwen as regards the rights issue? Determine the effect of each of

these actions on the wealth of the investor.

(6 marks)

(c)

Calculate the current earnings per share and the revised earnings per

share if the rights issue funds are used to redeem some of the existing

loan notes.

(6 marks)

www.studyinteractive.org

111

112

www.studyinteractive.org

Chapter 11

Efficient market

hypothesis

www.studyinteractive.org

113

CHAPTER CONTENTS

INTRODUCTION TO EMH ----------------------------------------------- 115

DEGREE OR FORMS OF EFFICIENCY ---------------------------------- 116

IMPLICATIONS OF EMH FOR FINANCIAL MANAGERS --------------- 117

114

www.studyinteractive.org

INTRODUCTION TO EMH

A market is efficient if:

The prices of securities traded in that market reflect all the relevant

information accurately and rapidly, and are available to both buyers and

sellers.

trading significantly.

Market efficiency from the perspective of the EMH relates to the efficiency of

information, the better the information received by investors, the better and

more informed the decisions they make will be.

As seen in chapter 1, the theoretical value of a share is based upon the dividends,

growth and risk:

P0 =

D0 (1+g)

Ke -g

analysis, then there must be a difference in how the share price is arrived at which

would suggest that the stock market has not processed information in the way that

the theory indicates.

The market would be said to be less than perfectly efficient. Either:

make share buying decisions.

www.studyinteractive.org

115

For the purpose of testing, EMH is usually broken down into 3 forms as follows:

1.

Weak form

Weak form hypothesis states that current share prices reflect all relevant

information about the past price movements and their implications. If this is true,

then it should be impossible to predict future share price movements from historic

information or pattern.

Share prices only changes when new information about a company and its profits

have become available. Since new information arrives unexpectedly, changes in

share prices should occur in a random fashion, hence weak form can be referred to

as random walk hypothesis.

2.

Semi-strong form hypothesis state that current share prices reflects both

(i)

all relevant information about past price movement and their implications;

and

(ii)

Any new publicly accessible information whether comments in the financial press,

annual reports or brokers investment advisory services, should be accurately and

immediately reflected in current share prices, so investment strategies based on

such public information should not enable the investor to earn abnormal profit

because these will have already been discounted by the market.

3.

Strong form

The strong form hypothesis states that current share prices reflect all relevant

information available from

managers.

116

www.studyinteractive.org

If capital markets are efficient, the main implications for financial managers are:

1.

The timing of issues of debt or equity is not critical, as the prices quoted in

the market are fair. That is price will always reflect the true worth of the

company, no over or under valuation at any point.

2.

techniques.

3.

The entitys share price will reflect the net present value of its future cash

flows, so managers must only ensure that all investments are expected to

exceed the companys cost of capital.

4.

Large quantities of new shares can be sold without depressing the share price.

5.

The market will decide what level of return it requires for the risk involved in

making an investment in the company. It is pointless for the company to try

to change the markets view by issuing different types of capital instrument.

6.

Mergers and takeovers. If shares are correctly priced this means that the

rationale behind mergers and takeovers may be questioned. If companies are

acquired at their current market valuation then the purchasers will only gain if

they can generate synergies (operating economies or rationalisation). In an

efficient market these synergies would be known, and therefore already

incorporated into the price demanded by the target company shareholders.

The more efficient the market is, the less the opportunity to make a speculative

profit because it becomes impossible to consistently out-perform the market.

Evidence so far collected suggests that stock markets show efficiency that is at

least weak form, but tending more towards a semi-strong form. In other words,

current share prices reflect all or most publicly available information about

companies and their securities.

www.studyinteractive.org

117

118

www.studyinteractive.org

Chapter 12

Valuation

www.studyinteractive.org

119

CHAPTER 12 VALUATION

CHAPTER CONTENTS

BUSINESS VALUATION ------------------------------------------------- 121

REASONS FOR VALUATION

121

COMPANY ACQUISITION

121

APPROACHES

121

THE DIVIDEND VALUATION MODEL

122

123

125

126

120

IRREDEEMABLE DEBT

129

REDEEMABLE DEBT

130

CONVERTIBLE DEBT

130

PREFERENCE SHARES

131

NON-TRADED DEBT

131

www.studyinteractive.org

CHAPTER 12 VALUATION

BUSINESS VALUATION

Reasons for valuation

The purpose of conducting the valuation will have an impact on the approach taken

and factors considered in arriving at the value:

Buying a business

Seeking finance.

Company acquisition

When an investor buys a company, the investment involves paying an acceptable

amount for the shares of the company and usually results in the investor assuming

responsibility for any debt carried by the company.

Debt will usually be valued as the present value of future interest and redemption.

The value of shares is open to wider variation in approach. Ultimately, any agreed

price will depend on the arguing positions of the two parties to the acquisition,

rather than the result of a formulaic approach.

Approaches

The three main approaches are:

Asset basis.

www.studyinteractive.org

121

CHAPTER 12 VALUATION

VALUING SHARES

The dividend valuation model

Seen earlier, the value of the share is the present value of the expected future

dividends discounted at the cost of equity.

Po

do (1 g)

ke g

FORMULA GIVEN

Advantages

1.

Considers the time value of money and has an acceptable theoretical basis.

2.

Disadvantages

1.

2.

3.

above assumes this to simplify DCF whilst it is possible to forecast and

discount varying cash flows).

Note

VE = Share price x Total number of shares.

Example 1

A company has the following information:

Share capital in issue is 20m ordinary shares, with a 25 par value.

Current dividend per share (paid recently) - 4

Dividend five years ago 2.5

Current equity beta 0.6

Market information:

Current market return 17%

Risk-free rate 6%

Required:

Calculate the market value of the company.

122

www.studyinteractive.org

CHAPTER 12 VALUATION

Example 2

A company has the following information:

Ordinary share capital (10m par value 50c)

Current dividend (ex div) - 16

Current EPS - 20

Current return earned on assets - 20%

Current equity beta 0.9

Current market return 11%

Risk-free rate 6%

Required:

Find the market capitalisation of the company.

Weaknesses

Investors do not normally buy a company for the book value of its assets, but

for the earnings / cash flows that the sum of its assets can produce in the

future.

It ignores intangible assets. It is very possible that intangible assets are more

valuable than the balance sheet assets.

Asset stripping.

Book value

There is never a circumstance where book value is an appropriate valuation base.

It may however be used as a stepping stone towards identifying another measure.

Only used to establish a minimum value for an asset, it may be difficult to find an

appropriate value over the short term. Used for a company when being broken up

or asset stripped.

Replacement cost

May be used to find the maximum value for an asset. Used for a company as a

going concern.

www.studyinteractive.org

123

CHAPTER 12 VALUATION

Example 3

Below is the most recent Statement of Financial Position for Fagin Co:

$

Non-current assets (carrying value)

625,000

160,000

_______

785,000

_______

Represented by

50c ordinary shares

300,000

Reserves

285,000

6% debentures

200,000

_______

785,000

_______

Notes:

The premises have a market value that is $50,000 higher than the book

value.

Required:

Value the ordinary shares on an assets basis.

124

www.studyinteractive.org

CHAPTER 12 VALUATION

Of particular use when valuing a majority shareholding:

1.

As majority shareholders, the owners can influence the future earnings of the

company.

2.

With a controlling interest, the investor will dictate the dividend policy,

making earnings more relevant than dividends.

PE method

PE ratios are quoted for all listed companies and calculated as:

PE

EPS

Value of company

using an adjusted P/E multiple from a similar quoted company (or industry

average).

Example 4

H Co is an unlisted company.

Extract from income statement for the year just ended:

$

430,000

110,000

______

Less: Preference dividend

Ordinary dividend

320,000

30,000

40,000

______

(250,000)

_______

70,000

_______

Required:

Calculate the value of the shares in H Co on a PE basis.

www.studyinteractive.org

125

CHAPTER 12 VALUATION

Earnings yield

The earnings yield is the inverse of the PE ratio:

Earnings yield

EPS

Pr ice per share

in exactly the same way as the PE ratio:

Value of company

Total earnings

EPS

1

Earnings yield

1

Earnings yield

Example 5

Company A has earnings of $300,000. A similar listed company has an earnings

yield of 12.5%.

Required:

Calculate a market value for Company A.

A buyer of a business is obtaining a stream of future operating or free cash flows.

The value of the business is:

PV of future cash flows

A discount rate reflecting the systematic risk of the flows should be used.

Method:

1.

tax payable

tax relief

2.

3.

4.

126

www.studyinteractive.org

CHAPTER 12 VALUATION

Advantages

Disadvantages

unavailable.

Assumes that the discount rate and tax rates are constant through the period.

www.studyinteractive.org

127

CHAPTER 12 VALUATION

Example 7

Recent financial information relating to Open Co, a listed company, is as follows.

$m

115

69

Dividends

Statement of financial position information:

$m

Non-current assets

Current assets

Total assets

Current liabilities

Equity

Ordinary shares ($1 nominal)

Reserves

120

705

Non-current liabilities

6% Bank loan

8% Bonds ($100 nominal)

105

190

$m

815

515

1,330

210

825

295

1,330

Forecasts are that the dividends of Open Co will grow in the future at a rate of 3%

per year. The forecast growth rate of the earnings of the company is 4% per year.

Considering the risk associated with expected earnings growth, an earnings yield of

11% per year can be used for valuation purposes.

The cost of equity is 10% per year and the gross redemption yield on debt is 7%.

The ex-dividend share price of the company is $850 per share.

Required:

Calculate the value of Open Co using the following methods:

(a)

(b)

(c)

128

www.studyinteractive.org

CHAPTER 12 VALUATION

VALUATION OF DEBT

When valuing debt we assume that

Market price

The relevant cash flows are interest payments and eventual redemption of the

capital.

The debt is valued based on gross values for cash flow and cost of debt capital.

Irredeemable debt

The company does not intend to repay the principal but to pay interest forever, the

interest is paid in perpetuity.

The formula for valuing a debenture is therefore:

MV

I

r

where:

I

MV

Example 8

A company has issued irredeemable loan notes with a coupon rate of 9%.

gross yield required by investors in this category of debt is 6% per annum.

The

Required:

Calculate the current market value of the debt.

www.studyinteractive.org

129

CHAPTER 12 VALUATION

Redeemable debt

The market value is the present value of the future cash flows, these normally

include:

1.

2.

Redemption value.

Example 9

The 8% Bonds in Open Co (example 7) will be redeemed at nominal value in 4

years time.

Required:

Calculate the market value of the debt.

Convertible debt

The market value of a convertible is the higher of its value as debt (the Floor

Value) and its converted value.

Example 10

WERT Co has $40m convertible loan notes with a coupon rate of 7%. Each $100

loan note may be converted into 16 ordinary shares at any time until the date of

expiry and any remaining loan note will be redeemed at $100.

The debenture has four years to redemption. Investors require a rate of return of

6% per annum.

The current share price of WERT Co is 600 cents which is expected to grow at 4%

per annum.

Required:

Calculate

(a)

(b)

(c)

130

www.studyinteractive.org

CHAPTER 12 VALUATION

Preference shares

Similar to irredeemable debt, the income stream is the fixed percentage dividend

received in perpetuity.

The formula is therefore:

P0

D

Kp

where:

D

P0

Kp

Example 11

A company has 11% preference shares in issue with a 50 cent par value.

required return of preference shareholders is 6%.

The

Required:

Calculate the market value of a preference share.

Non-traded debt

Non-traded debt has a value equal to the book value appearing in the statement of

financial position.

In example 7, Open Cos 6% Bank Loan would be valued at $105m in any gearing

or WACC working.

www.studyinteractive.org

131

CHAPTER 12 VALUATION

132

www.studyinteractive.org

Chapter 13

Risk

www.studyinteractive.org

133

CHAPTER 13 RISK

CHAPTER CONTENTS

FOREIGN CURRENCY RISK --------------------------------------------- 135

TRANSACTION RISK

135

TRANSLATION RISK

135

ECONOMIC RISK

135

SPOT RATE

136

136

INTERNAL HEDGING TECHNIQUES

137

138

141

FLOATING RATE SYSTEMS

143

143

143

BALANCE OF PAYMENTS

144

144

144

145

146

THE YIELD CURVE (TERM STRUCTURE OF INTEREST RATES)

147

SHORT-TERM MEASURES

148

134

www.studyinteractive.org

CHAPTER 13 RISK

The risk that the exchange rate may move up or down in relation to other

currencies. It will have a major impact on the predictability of profitability of any

company that buys from or sells to other countries.

Illustration

A company has a foreign asset with a value of 800,000.

The exchange rate is currently 0.7774 /$

The asset, therefore, has a current value of 800,000 0.7774 =

$1,029,071

The exchange rate has moved to 0.8000 /$

The asset value in dollars is now 800,000 0.8000

There is an exchange rate loss of

$1,000,000

$29,071

Transaction risk

The risk associated with short-term cash flow transactions.

If the asset of 800,000 is a trade receivable, the risk is classed as transaction risk.

The receipt of 800,000 concludes the transaction; the exchange rate loss

materialises and is irreversible.

Translation risk

Risk associated with the reporting of foreign currency assets and liabilities within

financial statements. The 800,000 asset may be a tangible non-current asset.

There is no cash flow impact of this type of risk. However, the impact on the

financial statements can be severe. In later periods, the exchange rate may move

in the opposite direction, resulting in an exchange rate gain.

There is still

uncertainty, though, about the reported results.

Translation risk may be managed by matching the assets and liabilities within each

country. If 800,000 were financed by borrowing 800,000, the net asset would be

0 and any movement in exchange rate would not affect the translated value.

Economic risk

Long-term cash flow effects associated with asset investment in a foreign country

or alternatively loans taken out or made in a foreign currency and the subsequent

capital repayments.

Economic risk is more difficult to hedge given the longer term nature of the risk

(possibly over 10 or more years). A simple technique would be to adopt a portfolio

approach to investments by currency to spread the risk.

www.studyinteractive.org

135

CHAPTER 13 RISK

Spot rate

A prevailing rate at a specific point in time usually refers to todays rate

Given as

0.7774 /$

0.7774 per $

This means that the Euro () is expressed in terms of one dollar ($); i.e. how many

Euro equate to one dollar.

May also be given as:

1.2863 $/

1.2863 $ per

Conversion rule

( and )

2nd currency to calculate the 1st

Currency amount

Rate

Conversion

/$

Divide

$/

Multiply

/$

Multiply

$/

Divide

The rate is usually expressed in terms of a bid/offer spread.

eg

0.7770 - 0.7778 /$

Banks will buy currency using the rate that gives them the lower outlay; they will

sell currency at the rate giving them the higher receipt.

Example 1

(a)

(b)

(i)

(ii)

(i)

(ii)

Required:

Calculate the values of the transactions.

136

www.studyinteractive.org

CHAPTER 13 RISK

Hedging is the process of reducing or eliminating risk. It may be achieved by using

internal or external measures.

Internal measures have the advantage of being essentially cost free but at the

same time are unlikely to completely eliminate the risk.

External measures involve a bank or financial market. They will incur cost but may

totally eliminate the risk.

Invoice in own currency

By invoicing in your own currency you do not suffer the risk of exchange rate

movement.

The risk does not disappear; instead it passes to the other party. It is questionable

whether the other party will be happy to accept this risk.

Matching or netting

If a company makes a number of transactions in both directions it will be able to

net off those transactions relating to the same dates. By doing so a company can

materially reduce the overall exposure, but is unlikely to eliminate it.

In order to perform netting the company must have a foreign currency bank

account in the appropriate country.

Leading involves settling trade payables earlier than the terms of trade require.

Although there may be a cost of capital associated with paying early there are

certain benefits relating to exchange rate risk:

The payment is made ahead of a period of uncertainty for the exchange rate.

customer, netting off and reducing exposure to exchange rate risk.

settlement discounts but facilitating netting against an anticipated currency receipt.

Do nothing

Exchange rates will fluctuate up and down. It could be argued that since you win

some and lose some then ignoring the risk would be the best option; particularly if

your company has frequent transactions (imports & exports) in a foreign currency.

As a result you save on hedging costs, the downside being that the exposure to

exchange rates is present in the short-term.

www.studyinteractive.org

137

CHAPTER 13 RISK

Forward contract

Features:

1.

specific amount at a fixed future date.

2.

3.

It is an over the counter (OTC) product which means that it is tailored to the

specific value and date required.

4.

The forward rate offers a perfect hedge because it is for the exact amount

required by the transaction on the appropriate date and the future rate is

known with certainty.

Forward rates

Forward rates are given by the banks and stated in the same way as spot rates,

with a bid-offer spread. The spread for forward rates is wider than that for spot

rates, giving the bank larger profit on forward deals due to the additional risks it

takes.

Spot rate

0.7770

Forward rate

1 month

3 months

0.7781

0.7802

per $

0.7778

spread

0.0008

0.7793

0.7820

0.0012

0.0018

Example 2

Danke Yudle Co, based in the US, expects the following transactions:

In 1 month:

Receipt of

265,000

Payment of

515,000

In 3 months time:

Receipt of

680,000

Payment of

230,000

Required:

Calculate the values of the future transactions using forward contracts.

138

www.studyinteractive.org

CHAPTER 13 RISK

Advantages

hedge in terms of amount and date.

Disadvantages

underlying transaction is in anyway doubtful this may be problem.

exchange rates. Potential of opportunity cost if the exchange rate moves

favourably.

Use of the short-term money markets to borrow or deposit funds. The hedge

involves matching future currency assets with liabilities and gives the company the

opportunity to exchange currency today at the prevailing spot rate.

Steps

1.

(i)

(ii)

available.

This ensures that there is no need for future conversion of

currency.

2.

in the rate.

3.

to other hedging approaches.

Advantages

There is some flexibility regarding the date at which the transaction takes

place.

The final step is not obligatory. The company could use proceeds generated

to earn a better return than that available from the domestic money market

(eg reducing an overdraft).

Disadvantages

www.studyinteractive.org

139

CHAPTER 13 RISK

140

www.studyinteractive.org

CHAPTER 13 RISK

Currency Futures

The Future is an exchange traded instrument that can be bought or sold on one of

four exchanges (the largest is in Chicago). Futures involve speculation on the

movement of the rate. If movements are guessed correctly, gains can be made at

the expense of those who guessed incorrectly.

The aim is to speculate on futures in such a way as to compliment the underlying

trade. Therefore you will have:

1.

exchange rate loss; or,

2.

exchange rate gain.

The linking of the two cancels out the movement of the exchange rate and leads to

the hedge.

Currency futures contracts are only available for a limited number of major

currencies and in predetermined (standardised) volumes. Each /$ futures contract

is for 125,000. Thus a transaction of 450,000 would either involve 3 contracts,

leaving 75,000 exposed to currency risk or 4 contracts with risk over 50,000 in

the futures market.

The future is also standardised financial instrument in terms date. If the underlying

transaction does not fall on one of four dates (March, June, September, December),

there will be an element of risk in the hedge known as basis risk.

Currency options

Options operate as insurance. A premium is paid which ensures that an eventual

receipt does not fall below a specified amount or an eventual payment does not

exceed a specified amount.

If the exchange rate moves favourably, there is no obligation to fulfil the option

contract. Options have the benefit of being a one-sided bet. You can protect the

downside risk of the currency moving against you but still take advantage of the

upside potential.

Standardised traded options (see futures) are available on some markets but

companies may deal in options over the counter, getting a contract that is tailor

made to their currency transaction.

www.studyinteractive.org

141

CHAPTER 13 RISK

142

www.studyinteractive.org

CHAPTER 13 RISK

External hedging techniques are all costly and should be avoided if there is little

currency risk. Whether there is a significant amount of risk will depend on various

factors including the system by which exchange rates between two currencies are

derived.

Exchange rates are a key measure for governments to attempt to control. They will

have direct bearing on the economic performance of the country.

Where the exchange rate is allowed to be determined without any government

intervention. It is determined by supply and demand.

The market has a tendency to be volatile to the adverse effect of trade and wider

government policy. This volatility can adversely affect the ability to trade between

currencies.

Where the market is allowed to determine the exchange rate but with government

intervention to reduce the adverse impacts of a freely floated rate.

The government may intervene by:

stimulate demand or supply and keep the currency within a trading range

reducing volatility.

Using interest rates. By increasing the interest rate within the economy the

government makes the currency more attractive to investors in government

debt and will attract speculative funds.

The peg may be changed from time to time to reflect the relative movement

in underlying value.

platform for trade. Pegged rates are typically used and managed by smaller

economies.

www.studyinteractive.org

143

CHAPTER 13 RISK

Balance of payments

The inflows and outflows from trade reflect demand for and supply of the home

currency. If there is a consistent deficit or surplus there will be a continuing excess

supply or demand for the currency that would be reflected in weakness or strength

in the currency.

For major traded currencies this effect is relatively small.

Of far more importance for major currencies are the flows of speculative capital

from one currency to another. An increase in the interest rate of one currency will

lead to an increase of demand for that currency increasing its value.

It is difficult to predict future rates based on this measure.

The theory that there is a no sum gain relating to investing in government bonds in

differing countries. Any benefit in additional interest is eliminated by an adverse

movement in exchange rates.

IRPT is an unbiased but poor predictor of future exchange rates.

principles of IRPT are used by banks calculating forward rates.

However, the

Example 5

The spot rate is 0.7774 per $.

Annual interest rates are:

7%

$5%

Starting with $1,000,000, show how the capital would grow if invested in $USD or

in EUR.

Required:

Calculate the expected exchange rate after one year.

Now

Interest

$

1,000,000

1.05

Rate

0.7774

1.07

+ 1 year

The predicted exchange rate would be:

144

www.studyinteractive.org

CHAPTER 13 RISK

F0 = S0

(1 ic )

(1 ib )

S0 = The spot rate (c per b)

ic =

Based on the law of one price in economic theory. This would suggest that the

relative price of the comparable products remains the same in all currencies.

The theory is that exchange rates will follow price changes to maintain the relative

value of products between two countries.

PPPT is an unbiased but poor predictor of future exchange rates.

Example 6

The spot rate is 0.7774.

AB has $10,000 to spend in the US where inflation is 3.72% per annum.

In Europe, inflation is projected at 5.7% per annum.

Required:

Illustrate how exchange rates might move to maintain purchasing power

parity.

Now

Inflation

$

10,000

Rate (/$)

0.7774

1.0372

1.057

+ 1 year

The baskets of goods that are comparable now will remain comparable after one

year so the predicted exchange rate would be 8,217/$10,372 = 0.7922 per $.

To calculate the impact of PPPT use the following (given) formula:

S1 = S0

(1 hc )

(1 hb )

S0 = The spot rate (c per b)

hc = The inflation rate for currency c

hb = The inflation rate for currency b

www.studyinteractive.org

145

CHAPTER 13 RISK

The assumption that all currencies must offer the same real interest rate. This links

IRPT to Purchasing Power Parity. It is based upon the Fisher effect.

The relative real interest rates should be the same due to the principle of supply

and demand, if a country offers a higher real interest rate investors will invest in

that currency and push up the price of the currency bringing the real rate back to

equilibrium.

The impact is that, although PPPT and IRPT should give the same predicted

exchange rate. Inflation rates are difficult to predict but interest rates are quoted,

making it easier to predict using IRPT.

Remember the Fisher effect:

(1 + i) = (1 + r)(1 + h)

Illustration

(using values from previous illustrations for PPPT and IRPT)

Now

+ 1 year

PPPT

IRPT

0.7774

0.7774

1.057/1.0372

1.07/1.05

0.7922

0.7922

Euro

US

= 1.07/1.057 - 1

= 1.05/1.0372 1

= 1.23%

= 1.23%

The reason for both PPP and IRP having the same prediction is because the

international Fisher effect holds true.

146

www.studyinteractive.org

CHAPTER 13 RISK

A company will be exposed to interest rate risk if it knows today that it expects to

make a financial transaction (borrowing or investing) but not for a few months.

For example, a company has debentures which are due for redemption in 18

months time. The company will maintain its capital structure by taking out new

debt to pay for redemption of the existing debt.

Borrowing rates are currently low but there is speculation that they may rise

substantially over the next two years.

If the company aims to minimise risk, it will take steps now to ensure that the

eventual interest rate is known in advance.

The relationship between the gross redemption yield of a debt investment and its

term to maturity.

There are 3 elements:

Gross

Redemption

Yield

Term to maturity

1.

Liquidity preference

Investors prefer to be liquid over being illiquid. To encourage investment over the

longer term the long-term debt must offer a higher return over short-term debt.

2.

Market expectations

If interest rates are expected to fall over time long-term rates will be lower than

short-term rates. This would lead to an inverted yield curve.

3.

Market segmentation

Differing parts of the market (short-term vs long-term debt markets) may react to

differing economic information meaning that the yield curve is not smooth but

suffers discontinuities.

www.studyinteractive.org

147

CHAPTER 13 RISK

We may hedge interest rate risk over the short or the long-term.

Short term hedging

Long-term hedging

Swaps

Interest rate futures

Interest rate options

Short-term measures

Forward rate agreements (FRA)

The fixing of the interest rate today in relation to a future short-term loan. It is an

obligation that must be taken once entered into. It is OTC and tailored to a specific

loan in terms of:

1.

Date

2.

Amount, and

3.

Term

and offers a perfect hedge. The FRA is wholly separate to the underlying loan.

It will give certainty as regards the interest paid but there is a downside risk that

interest rates may fall and we have already fixed at a higher rate.

Similar to a FRA but an option rather than on obligation. In the event that interest

rates move against the company (eg rise in the event of a loan) the option would

be exercised. If the rates move in our favour then the option is allowed to lapse.

There is a premium to pay to compensate the IRG writer for accepting the

downside risk.

An exchange traded instrument that works in a similar manner to a FRA.

trading on the exchange the Future can fix the rate today for a future loan.

By

Similar to an IRG but exchange traded, the option gives protection against the

downside for the payment of a premium.

148

www.studyinteractive.org

CHAPTER 13 RISK

A company will borrow either using a variable or a fixed rate. If it wishes to change

its borrowing type it could redeem its present debt and re-issue in the appropriate

form. There are risks and costs involved in doing so.

A swap allows the company to change the exposure (fixed to variable or vice versa)

without having to redeem existing debt.

To prepare a swap we need the following steps:

1.

other side of the transaction. If we want to swap fixed for variable they will

want the opposite.

2.

Agree the terms of the swap to ensure that at the outset both parties are in a

neutral position.

3.

parties to reflect any movement in the prevailing exchange rates.

Advantages of swaps

Allows a change in interest rate exposure at relatively low cost and risk.

May allow access to a debt type that is otherwise unavailable to the company.

www.studyinteractive.org

149

CHAPTER 13 RISK

150

www.studyinteractive.org

Chapter 14

Working capital

management

www.studyinteractive.org

151

CHAPTER CONTENTS

WORKING CAPITAL MANAGEMENT AN OVERVIEW --------------- 153

WORKING CAPITAL SEESAW

154

154

CREDIT MANAGEMENT

155

DISCOUNTS FOR EARLY PAYMENT

156

FACTORING

157

MATERIAL COSTS

158

158

160

161

162

163

LIQUIDITY RATIOS

164

CASH MANAGEMENT ---------------------------------------------------- 167

THE MILLER-ORR MODEL

167

168

CASH BUDGET

169

152

ROLE

171

171

172

www.studyinteractive.org

CURRENT

ASSETS

CURRENT

LIABILITIES

MINUS

Inventory

Payables

Receivables

Cash and Bank

Bank overdraft

Require funding

Aim : Minimise

current assets

Provide funding

Aim: Maximise

current liabilities

The cash operating cycle is the length of time between the companys outlay on raw

materials, wages and other expenditures and the inflow of cash from the sale of

goods.

Purchases

Sales

Inventory

Receipt

Receivables

Days

Payables

Payment

www.studyinteractive.org

Operating cycle

153

Example 1

Statement of Comprehensive Income extract

Turnover

Gross profit

Statement of Financial Position extract

Current Assets

Inventory

Receivables

$

250,000

90,000

$

30,000

60,000

180,000

Current Liabilities

Payables

50,000

Required:

Calculate the current operating cycle.

Have sufficient

working capital

assets to conduct

business

investment to a

minimum to avoid

the financing cost

1.

2.

3.

4.

154

www.studyinteractive.org

MANAGING RECEIVABLES

Offering credit

encourages

customers to take up

our goods

risk of default, defers

inflow of cash and needs

managing

Credit management

There are three aspects to credit management:

1.

2.

Terms

3.

The creditworthiness of all new customers must be assessed before credit is

offered. Existing customers must also be re-assessed on a regular basis. The

following may be used to assess credit status of a company

1.

Bank References

2.

Trade References

3.

Published accounts

4.

5.

Terms

Considerations may include:

1.

2.

3.

4.

The credit policy is dependent on the credit controllers implementing a set of

procedures. If the system is not rigorous, those debtors who dont want to pay will

find ways not to pay. A process may be like the following:

SALE

30 days

+30 days

+7 days

+7 days

Credit allowed

Statement

of account

Reminder

notice

2nd

Reminder

www.studyinteractive.org

+7 days

Threat of

legal action

+7 days

Instigate

legal action

155

The receivables balance needs to be financed. Any change to the receivables

balance will lead to a change in the financing cost of the business.

Receivables Turnover x

Receivables days

365

Example 2

Shanks Limited has sales of $40m for the previous year; receivables at the yearend were $8m. The cost of financing debtors is covered by an overdraft at an

annual interest rate of 14%.

Required:

(a)

(b)

Cash discounts are given to encourage early payment by customers. The cost of

the discount is balanced against the savings the company receives from a lower

balance and a shorter average collecting period.

Example 3

Shanks as above but a discount of 2% is offered for payment within 10 days.

Required:

Advise whether, on financial grounds, the company should introduce the

discount given that 50% of the customers would be expected to take up

the discount?

156

www.studyinteractive.org

Advantages/Disadvantages

Advantages

1.

2.

Disadvantages

1.

2.

3.

Customers may pay over normal terms but still take the cash discount.

Factoring

There are three main types of factoring service available:

1.

2.

Credit Insurance

3.

Financing.

Example 4

Shanks again but a factor has offered a debt collection service which should shorten

the debt collection period on average to 50 days. It charges 1.6% of turnover but

should reduce administration costs to the company by $175,000.

Required:

Advise whether the company should use the factoring facility.

Advantages/Disadvantages

Advantages

1.

2.

Particularly useful for small and fast growing businesses where the credit

control department may not be able to keep pace with volume growth.

Disadvantages

1.

2.

3.

4.

5.

The company may give up the opportunity to decide to whom credit may be

given.

www.studyinteractive.org

157

MANAGING INVENTORY

Holding inventory is

necessary for operations;

in terms of finished goods

it offers greater choice to

customers

costs, in particular there is

the opportunity cost of

money tied up in inventory

Material costs

Material costs are a major part of a companys costs and need to be carefully

controlled. There are 4 types of cost associated with inventory:

1.

ordering costs

2.

holding costs

3.

stock-out costs

4.

purchase cost.

Ordering costs

The clerical, administrative and accounting costs of placing an order.

usually assumed to be independent of the size of the order.

They are

Holding costs

Holding costs include items such as:

1.

2.

Storage costs

3.

Insurance costs

4.

Deterioration.

Stock-out costs

1.

2.

3.

4.

The economic order quantity, EOQ, is the regular order size to be placed in order to

minimise inventory related costs.

158

www.studyinteractive.org

As the size of the order increases, the average inventory held increases and holding

costs will also tend to increase.

As the order size increases the number of orders needed decreases and so the

ordering costs fall. The EOQ determines the optimum combination.

Q=

2Co.D

Ch

Co

Annual demand

Ch

Cost

Total cost

Cost C

C

o

s

t

s

t

s

Holding Costs

Ordering Costs

EOQ

Reorder Quantity

Example 5

A company requires 10,000 units of material X per month. The cost per order is

$30 regardless of the size of the order. The holding costs are $20 per unit per

annum. It is only possible to buy in quantities of 500, 600 or 700 units at one

time.

Required:

(a)

quantity.

(b)

www.studyinteractive.org

159

The sum of the holding and ordering costs are minimised at the EOQ. There will

however be savings in the purchase cost when the bulk discount volume is taken.

Calculate total costs at each possible level of discount to establish whether the

discount is worth taking.

Example 6

Annual demand is 120,000 units. Ordering costs are $30 per order and holding

costs are $20/unit/annum. The material can normally be purchased for $10/unit,

but if 1,000 units are bought at one time they can be bought for $9,800.

Required:

Calculate the order quantity which will minimise the total cost.

160

www.studyinteractive.org

Short-term sources of

finance

Long-term sources of

finance

Bank overdraft

Trade creditors

Equity

Long-term debt

Examples

Advantages

1.

2.

3.

what is needed

Cheaper liquidity

preference

Easier to source

1. Secure no need to

constantly replenish

2. Lower financing risk

3. Matching funding to need

Fluctuating

current

assets

Short-term

funds

Current

Assets

Permanent

current assets

Short-term

funds or

Long-term

funds

Time

Conservative strategy

Where permanent current assets and some fluctuating current assets are financed

long-term to take advantage of the security of the long-term nature of the finance.

Aggressive strategy

Where all fluctuating current assets are financed short-term to take advantage of

the lower cost of short term financing.

www.studyinteractive.org

161

Trade credit

The delay of payment to suppliers is effectively a source of finance.

By paying on credit terms the company is able to fund its inventory and

receivables investment at the expense of its suppliers.

Overdrafts

A source of short-term funding which is used to fund fluctuating working capital

requirements.

Its great advantage is that you only pay for that part of the finance that you need.

The overdraft facility (total limit) is negotiated with the bank on a regular basis

(maybe annually). For a company with a healthy trading record it is normal for the

overdraft facility to be rolled over from one year to the next although theoretically

it is repayable on demand.

Bank loans

Bank loans or term loans are loans over between one and three years which have

become increasingly popular over the past ten to fifteen years as a bridge between

overdraft financing and more permanent funding.

Factoring

As well as providing administrative support, factoring works as a source of financing

as:

a. Efficient credit control brings cash in sooner, reducing the operating cycle.

b. Factors may offer advances on receivables balances.

Invoice discounting

A service also provided by a factoring company.

Selected invoices are used as security against which the company may borrow

funds. This is a temporary source of finance repayable when the debt is cleared.

The key advantage of invoice discounting is that it is a confidential service, the

customer need not know about it.

Bills of exchange

A means of payment whereby by a promissory note is exchanged for goods.

The bill of exchange is simply an agreement to pay a certain amount at a certain

date in the future. No interest is payable on the note but is implicit in the terms of

the bill.

162

www.studyinteractive.org

Some sources of finance are used to purchase individual assets using the asset as

security against which the funds are borrowed.

Hire purchase

The purchase of an asset by means of a structured financial agreement.

Instead of having to pay the full amount immediately, the company is able to

spread the payment over a period of typically between two and five years.

Finance lease

A type of asset financing that appears initially very similar to hire purchase. Again

the asset is paid for over between two and five years (typically) and again there is

a deposit (initial rental) and regular monthly payments or rentals.

The key difference is that at the end of the lease agreement the title to the asset

does not pass to the company (lessee) but is retained by the leasing company

(lessor). This has important potential tax advantages.

Operating lease

In this situation the company does not buy the asset (in part or in full) but instead

rents the asset.

The operating lease is often used where the asset is only required for a short period

of time such as Plant Hire or the company has no interest in acquiring the asset

simply wishing to use it such as a company vehicle or photocopier.

www.studyinteractive.org

163

Liquidity measures

Efficiency measure

Issue

avoid running out of cash

of cash within the company

Measures

Current ratio

Quick ratio

Liquidity ratios

Current assets may be financed by current liabilities or by long-term funds. The

ideal current ratio is 2:1. This would mean that half of the current assets are

financed by current liabilities and therefore half by long-term funds. Similarly the

ideal quick ratio is 1:1.

Current ratio

A measure that considers the manner in which current assets are financed. A safe

measure is considered to be 2:1 or greater meaning that only a limited amount of

the assets are funded by the current liabilities. This would arise if the company

adopted a conservative approach to financing.

Current Ratio

Current Assets

Current Liabilities

Quick ratio

A measure of how well current liabilities are covered by liquid assets. A safe

measure is considered to be 1:1 meaning that we are able to meet our existing

liabilities if they all fall due at once.

Quick Ratio =

(or acid test)

164

Current Liabilities

www.studyinteractive.org

OVERTRADING

Overtrading is the term applied to a company which rapidly increase its turnover

without having sufficient capital backing, hence the alternative term undercapitalisation.

Output increases are often obtained by more intensive utilisation of existing fixed

assets, and growth tends to be financed by more intensive use of working capital.

Overtrading companies are often unable or unwilling to raise long-term capital and

thus tend to rely more heavily on short-term sources such as overdraft and trade

creditors.

Overtrading is thus characterised by rising borrowings and a declining liquidity

position in terms of the quick ratio, if not always according to the current ratio.

Symptoms of overtrading

1.

2.

3.

4.

5.

6.

quickly if creditors lose confidence in the business, or if there is general tightening

of credit in the economy resulting to liquidity problems and even bankruptcy, even

though the firm is profitable.

www.studyinteractive.org

165

166

www.studyinteractive.org

CASH MANAGEMENT

Holding cash is

necessary to be able

to pay the bills and

maintain liquidity

that costs money to

fund but generates

little or no return

1.

2.

3.

A model that considers the level of cash that should be held by a company in an

environment of uncertainty. The decision rules are simplified to two control levels

in order that the management of the cash balance can be delegated to a junior

manager.

Maximum level

Cash

balance

spread

Return point

spread

Minimum level

Time

The model allows us to calculate the spread. Given that we have the spread all key

control levels can be calculated.

www.studyinteractive.org

167

Maximum level = minimum level + spread

Return point = minimum level + spread

Example 8

The minimum level of cash is $25,000. The variance of the cash flows is $250,000.

The transaction cost for both investing and en-cashing funds is $50. The interest

rate per day is 0.05%.

Required:

Calculate the:

(a)

spread

(b)

maximum level

(c)

return point.

The use of the EOQ model to manage cash.

Q=

2Co.D

Ch

Co

Ch

Example 9

A company generates $5,000 per month excess cash. The interest rate it can

expect to earn on its investment is 6% per annum.

The transaction costs

associated with each separate investment of funds is constant at $50.

Required:

(a)

transaction.

(b)

168

www.studyinteractive.org

Cash budget

A budget prepared on a monthly basis (at least) to ensure that the company has an

understanding of its cash position going forward. There are 3 considerations:

1.

2.

3.

Example 10

Cash flow forecasts from the current date are as follows:

($000)

Cash operating receipts

Cash operating payments

Interest payable on traded bonds

Capital expenditure

Month 1

6,530

5,040

Month 2

5,300

4,750

200

Month 3

4,300

4,600

1,000

The director has completed a review of accounts receivable management and has

proposed staff training and operating procedure improvements, which he believes

will reduce accounts receivable days by 18 days. This reduction would take four

months to achieve from the current date, with an equal reduction in each month.

Overdraft interest is payable at a rate of 0.5% per month, with payments being

made each month based on the opening balance at the start of that month. Credit

sales for the year to the current date were $60,500,000 and cost of sales was

$42,320,000. These levels of credit sales and cost of sales are expected to be

maintained in the coming year. Assume that there are 365 working days in each

year.

Required:

Calculate:

(a)

(b)

implemented.

www.studyinteractive.org

169

Example 11

Kool Co has annual sales revenue of $7 million and all sales are on 30 days credit,

although customers on average take fifteen days more than this to pay.

Contribution represents 55% of sales and the company currently has no bad debts.

Accounts receivable are financed by an overdraft at an annual interest rate of 8%.

Kool Co plans to offer an early settlement discount of 1.4% for payment within 20

days and to extend the maximum credit offered to 65 days.

The company expects that these changes will increase annual credit sales by 8%,

while also leading to additional variable costs equal to 0.5% of turnover. The

discount is expected to be taken by 35% of customers, with the remaining

customers taking an average of 65 days to pay.

Required:

(a)

the profitability of Kool Co.

(b)

Tiger Co, a subsidiary of Kool Co, has set a minimum cash account balance of

$2,000. The average cost to the company of making deposits or selling

investments is $50 per transaction and the standard deviation of its cash

flows was $1,000 per day during the last year. The average interest rate on

investments is 9.125%.

Determine the spread, the upper limit and the return point for the

cash account of Tiger Co using the Miller-Orr model and explain the

relevance of these values for the cash management of the company.

170

www.studyinteractive.org

A function devoted to all aspects of cash within a company.

This includes:

1.

Investment

2.

Raising finance

3.

4.

5.

Risk

6.

Insurance.

Role

Treasury management is the corporate handling of all financial matters, the

generation of external and internal funds for business. The management of

currencies and cash flows, and complex strategies, policies and procedures of

corporate finance.

In a large organisation there is the opportunity to have a single head office treasury

department or to have individual treasury departments in each of the divisions.

Modern practice would suggest the decentralised route where there is little or no

head office intervention in the workings of an autonomous division. This runs

contrary to treasury practice where large companies tend to have a centralised

function.

Advantages of centralisation

1.

will enable the use of specialist employees in each of the roles of the

department.

2.

Borrowing can be made in bulk taking advantage of better terms in the form

of keener interest rates and less onerous conditions.

3.

Pooled investments will similarly take advantage of higher rates of return than

smaller amounts.

4.

Pooling of cash resources will allow cash-rich parts of the company to fund

other parts of the business in need of cash.

5.

Advantages of decentralisation

1.

requirements and problems.

2.

www.studyinteractive.org

171

Should the treasury department be run as a cost centre or a profit centre?

Profit centre A function to which both costs and revenues are accounted for.

Advantages of using a profit centre

1.

The use of the treasury department is given a value which limits the use of

the service by the divisions.

2.

The prices charged by the treasury department measure the relative efficiency

of that internal service and may be compared to external provision.

3.

The treasury department may undertake part of the hedging risk of a trade

thereby saving the company as a whole money.

4.

The department may gain other business if there is surplus capacity within the

department.

5.

business.

1.

different to the rest of the business and hence require specialist oversight if

run as a profit making venture.

2.

make a profit function viable.

3.

readily quantify. In the event of a position going wrong the company may be

dragged down as a result of a single transaction.

172

www.studyinteractive.org

Solutions to examples

www.studyinteractive.org

173

SOLUTIONS TO EXAMPLES

CHAPTER

1

INTRODUCTION

FINANCIAL

MANAGEMENT:

AN

1.

2.

Growth prospects

3.

Example 1

(a)

P0 =

(b)

P0 =

(c)

P0 =

(d)

P0 =

174

23 x 1.04

0.12-0.04

23 x 1.04

0.15-0.04

23 x 1.06

0.12-0.06

23

0.12

= 299 cents

= 217 cents. More risk makes the share less attractive

= 406 cents. Enhanced growth sees the share price increase

= 192 cents

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 1

10,000 x 1.054 = $12,155

Example 2

Year

Price ($30)

31.35

32.76

34.23

35.78

Cost ($12)

12.72

13.48

14.29

15.15

Contribution

18.63

19.28

19.94

20.63

Example 3

12,155 x 1.05-4 = $10,000

Example 4

Year (n)

FV

(1 + r)-n

Present Value

360,000

280,000

0.907

0.7835

326,520

219,380

Example 5

Year

FV

PVF

Present Value

40,000

40,000

40,000

40,000

40,000

0.952

0.907

0.864

0.823

0.784

38,080

36,280

34,560

32,920

31,360

Total = $173,200

OR

40000 x (0.952 + 0.907 + 0.864 + 0.823 + 0.784) = $173,200

Example 6

$12,500 x 7.536 = $94,200

Investing $90,000 gives something worth $94,200 in return. The investor makes a

gain in wealth of $4,200.

www.studyinteractive.org

175

SOLUTIONS TO EXAMPLES

Example 7

(a)

(b)

$317,000

$317,000

$238,067

st

2nd to 4th = 3 year annuity (100,000 x 2.487)

247,800

$348,700

Example 8

1.

Starting at time 5; value at time 4 is

Present value (200,000 x 0.708)

176

$200,0002.

200,000

$141,600

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 1

Time

Price

V Cost

3%

30.00

30.90

31.83

32.78

4.50%

12.00

12.54

13.10

13.69

Contribution

18.00

18.36

18.72

19.09

Volume

10000

12500

12500

7500

180000

229500

234000

143175

-54000

-68850

-70200

-42952

38625

28969

21727

44180

Total Contribution

Tax

30%

Capital Allowance

Resale

70000

Working Capital

-12938

-1738

22796

36880

Net Cash

167062

212387

216915

201582

1232

151900

175400

162900

137700

800

327300

490200

627900

628700

10%

Cumulative

Investment

515000

Working Capital

45000

68700

Example 2

NPV

000

X

69

10%

-29

15%

18%

20%

r%

Example 3

69

(18 - 10) 15.6%

10

69

(-29)

www.studyinteractive.org

177

SOLUTIONS TO EXAMPLES

Example 1

(a)

(b)

Discounted by 3 further years: $317,000 x .751 = $238,067

(c)

2.487

1.000

3.487

PV = $348,700

Example 2

(a)

(b)

Example 3

(1 + money) = 1.08 x 1.05 = 1.134. Money rate = 13.4%

Example 4

(1 + r) = 1.123 1.04 = 1.0798. Real rate = 8%

Example 5

WACC = 12%; real rate = 8%

Money Analysis

Year

217,560

225,392

233,506

0.893

0.797

0.712

194,281

179,637

166,256

Annual contribution

6,000 x (50 15) inflated

12% PVF

$PV

Cumulative

$540,174

Real Analysis

3 year Annuity 6,000 x (50 15)

8% annuity factor

Present Value

210,000

2.577

$541,170

178

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 6

Purchase price = $45,000

Year

8% PVF

0.926

0.857

0.794

0.735

0.681

5,000

5,000

5,000

7,000

11,000

PV

4,630

4,287

3,969

5,145

7,486

n/a

n/a

18,000

14,000

6,000

14,289

10,290

3,403

PV

Present Value of:

EAC

3 year cycle

4 year cycle

5 year cycle

$43,597

$52,741

$67,114

2.577

3.312

3.993

$16,918

$15,924

$16,808

LOWEST

Example 7 - divisible

Project

Initial investment

$000s

NPV

$000s

PI

Rank

100

25

0.250

200

35

0.175

80

21

0.262

75

10

0.133

Invest

Project

Proportion

Capital

Remaining

NPV

100%

80

270

21

100%

100

170

25

170/200

170

29.8

Total

75.8

Example 7 - indivisible

Feasible combinations: A&C (46); A&D (35); B only (35); C&D (31)

www.studyinteractive.org

179

SOLUTIONS TO EXAMPLES

Example 8

(i)

Allocate the $800,000 based upon Profitability Index (NPV per $ invested)

P.I.

Rank

0.109

0.128

0.198

1

NPV

79.2

51.2

(ii)

130.4

Projects 1 and 2 (investing 300 + 450) give

32.7+57.6

90.3

32.7+79.2

111.9

Workings

Project 1

Discount given nominal (money) values at the nominal cost of capital of 12%

Time

$000

85

90

95

100

95

12% PVF

.893

.797

.712

.636

.567

$PV 75.9

71.7

67.6

63.6

53.9

332.7

Cumulative

(300.0)

NPV

32.7

Project 2

Discount annuity in nominal terms using the 12% nominal cost of capital

$140.8 x 3.605 =

507.6

Initial Investment

(450.0)

NPV

57.6

Project 3

Either: inflate $120,000 to nominal terms using 3.6% inflation and discount at

nominal 12%;

Or: leave $120,000 as an annuity in real terms and discount at the real cost of

capital (the less complex option).

(1 + i) = (1+r)(1+h)

1.12 = (1+r) x 1.036

1+r = 1.121.036 = 1.082

180

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Use 8% factors

PV = $120.0 x 3.993 =

Initial investments =

479.2

(400.0)

NPV

79.2

Example 9

NPV working (with detail for sensitivity analysis)

Time

Amount

PVF

$PV

1-3

Revenue

2.487

298,440

1-3

Variable Cost

30,000

1-3

Contribution

90,000

2.487

223,830

1-3

Fixed Cost

65,000

2.487

161,655

120,000

Present Value

62,175

Investment

50,000

$12,175

Sensitivity to:

(i)

Price:

Breakeven sales price will be $12 x (1 0.041) = $11.51 per

unit

(ii)

Volume:

Breakeven volume = 10,000 x (1 0.054) = 9460 units p.a.

(iii)

Fixed costs:

Breakeven cost = 65,000 x (1- 0.075) = $60,125 p.a.

Example 10

(a)

Expected NPV

(1250 x 0.12) + (650 x 0.30) + (320 x 0.25) + ((750) x 0.33) = $177,500

Positive NPV suggests accepting the project.

(b)

Ignores the fact that the most likely outcome is to make a whopping big loss.

Relies on probabilities which have no statistical backing.

Even if the probabilities were in any way reliable, this is an average value

which would only be achieved if the decision were repeated frequently and,

everyone knows, Toorongs rarely makes a Wryte once, let alone repeatedly!

www.studyinteractive.org

181

SOLUTIONS TO EXAMPLES

Example 11

Time

Operating cash flows

1

$000

2

$000

3

$000

4

$000

5

$000

167

212

217

202

379

596

Cumulative

Cumulative cash flows reach and exceed outlay during 3

within 3 years.

$560

rd

Example 12

Time

Operating cash flows

PVF @ 10%

PV

1

$000

2

$000

3

$000

4

$000

5

$000

167

212

217

202

0.909

0.826

0.751

0.683

0.621

152

175

163

138

327

490

628

Cumulative

$560

Example 13

Discount at after-tax cost of borrowing (15 x (1-0.33)) 10%

Leasing option

Time

Lease payments

33% tax relief

Net

10% PVF

Present Value

0

$000

(30)

1

$000

(30)

(30)

(30)

0.909

(27.3)

(30)

2

$000

(30)

9.9

(20.1)

0.826

(16.6)

3

$000

(30)

9.9

(20.1)

0.751

(15.1)

4

$000

5

$000

9.9

9.9

0.683

6.8

9.9

9.9

0.621

6.1

$76,100

Buying option

Time

Purchase/Resale

Tax relief on capital

allowances

10% PVF

Present Value

0

$000

(100)

1

$000

0.909

(100)

2

$000

3

$000

5

$000

6.2

4

$000

10

4.6

8.3

0.826

6.9

0.751

4.7

0.683

10.0

0.621

6.6

10.6

$71,800

182

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 14

Average level of profit (165 + 189 + 186 + 143) 4

170,500

292,500

www.studyinteractive.org

58.3%

183

SOLUTIONS TO EXAMPLES

No worked examples

184

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 1

Ke = [(20 x 1.05) 400] +0.05 = 0.1025 OR 10.25%

Example 2

369 cum-div with a dividend of 36 becomes 333 ex-div

Ke = [(36 x 1.04) 333] +0.04 = 15.2%

Example 3

Growth = 0.133

Ke = [(33 x 1.133) 600] +0.133 = 19.5%

Example 4

Growth = 0.079

Ke = [(11 x 1.079) 258] + 0.079 = 12.5%

Example 5

Growth = 70% x 12% = 8.4% OR 0.084

Ex-div P0 is 500 40 = 460

Ke = [(40 x 1.084) 460] + 0.084 = 17.8%

Example 6

Ke = 8 + 1.2 x (15 8) = 16.4%

Example 7

Ke = 6 + 0.8 x (8) = 12.4%

Example 8

Kd = [10 x (1-0.3)] 120 = 5.83%

www.studyinteractive.org

185

SOLUTIONS TO EXAMPLES

Example 9

Time

Cash

%amount

1st PVF 7%

1st PV

2nd PVF 5%

2nd PV

1-5

I(1-T)

4.100

28.7

4.329

30.3

Redemption

100

0.713

71.3

0.784

78.4

P0

100

108.7

(102)

(102)

1st NPV

2nd NPV

(2)

6.7

NPV at different costs of capital (you only need to work out two)

Rate

4%

5%

6%

7%

8%

9%

10%

NPV

11.4

6.7

2.2

-2

-6.0

-9.8

-13.4

15

10

5

0

4%

5%

6%

7%

8%

9%

-5

-10

-15

-20

-25

Example 10

Value

Equity

Debt

Total

20,000 x $3

8,000 x 85%

60,000

6,800

V (Ve + Vd)

60 66.8

89.9%

6.8 66.8

10.1%

66,800

186

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 11

Value of 25 shares after 4 years with 6% growth: 25 x $4 x (1.06)4 = $126.25

Likely outcome is conversion rather than redemption (worth $100).

Time

Cash

1-4

I(1-T)

Redemption

1st PVF 7%

1st PV

2nd PV

3.387

23.7

3.170

22.2

126.25

0.763

96.3

0.683

86.2

% amount

120

0

P0

108.4

(110)

1st NPV

10

(110)

2nd NPV

(1.6)

Example 12

Kpref = 9 140 = 6.4%

Example 13

Interest rate = 12%; cost of debt = 12 x (1 0.3) = 8.4%

Example 14

Cost of Debt = [10 x (1 0.7)] 120 = 5.8%

www.studyinteractive.org

187

SOLUTIONS TO EXAMPLES

No examples.

188

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 1

Year to:

June 2011

Sept 2011

400

480

40

10

10

Total return

50

12

12.5%

2.5%

Starting Price

As a % of starting

Example 2

r = 10 + 1.3 x (20 10) = 23%

None. There is different business risk so the companys cost of capital is irrelevant.

Example 3

Need a beta from a gaming company with 37.5% debt (3:5 for Foreignin).

L has 35%; C has 40%, therefore the relevant beta is approximately half way

between Ls (1.1) and Cs (1.18) use 1.14.

Ke = 6 + 1.14 x (11 6) = 11.7%

Example 4

Ignore current beta since it reflects a different business risk to the investment.

Proxy beta = 1.3

Asset beta = 1.3 x [60 (60 + 40(1-0.3))] = 0.886

(a)

Ke = 4 + 1.15 x (10 4) = 10.9%

(b)

Ke = 4 + 2.33 x (10 4) = 18%

www.studyinteractive.org

189

SOLUTIONS TO EXAMPLES

Example 1

$m

ROCE

Equity Finance

Debt Finance

10/42

10/(20 + 22)

= 23.81%

= 23.81%

10

10

Working

PBIT

Less Interest

PBT

10%

(2)

10

(3)

(2.4)

PAT

5.6

ROE

7/42

5.6/22

= 16.67%

= 25.45%

Less Tax

@30%

Example 3

Financial Gearing

Debt

5 + 8 + 1 = 14

Equity

8 + 4 + 2 = 14

14/14 = 100%

14/28 = 50%

20/4.5

Example 4

(a)

Interest coverage

=

(b)

190

PBIT/ interest

4.44 X

The level of cover suggest that we can cover our interest payments four times

over, although this may be considered relatively safe it does suggest a high

proportion of the profits generated are used solely to service debt leaving

relatively little available to re-invest in the company or pay out in the form of

dividends.

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 5

(a)

$000s

Sales

+12%

Cost of sales

VC 85%

FC 15%

Gross profit

Admin costs

+ 5%

PBIT

Interest

+500

@30%

PAT

Dividends

Equity financing

56,000

56,000

(28,560)

(4,500)

(28,560)

(4,500)

22,940

22,940

(14,700)

(14,700)

8,240

PBT

Tax

Debt financing

@60%

RE

www.studyinteractive.org

(800)

8,240

(300)

7,440

7,940

(2,232)

(2,382)

5,208

5,558

3,125

3,335

2,083

2,223

191

SOLUTIONS TO EXAMPLES

(b)

Evaluation

Financial gearing

= D/E

Debt financing

Equity financing

2,500 + 5,000

2,500

Existing = 11.1%

=

22,560 + 2,083

22,560 + 2,223 +

5,000

30.4%

8.4%

Operational gearing

= FC/TC

Existing = 42%

Interest cover

4,500 + 14,700

33,060 + 14,700

40.2%

8,240

= PBIT/ interest

Existing = 20 X

= PAT/ No of shares

Existing = 39.9c

800

10.3 X

40.2%

8,240

=

=

300

27.5 X

5,208

5,558

10,000

12,500

= 52.1c

= 49.4c

Comment

The project should be accepted because no matter how it is financed it will

materially increase the companys earnings per share and improve the return

to shareholders.

Financing by debt will have the effect of increasing the earnings per share by

a greater amount but at the expense of increasing financial risk. Both capital

structure and ability to pay interest as it falls due will be worse as a result of

debt. Both measures appear to be safe however as the existing position is

very safe.

Financing

debt. It

structural

payments

by equity will still improve earnings per share but not as much as

will however reduce the financial risk to the company in both

terms as gearing falls to only 8% and ease pressure from interest

on profits.

Example 6

EPS = $14m/6m = 233c per share

192

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 7

P/E Ratio

Dividend yield

Dan

Steph

200/10

80/8

= 20 X

= 10 X

2/10 x 100

8/8 x 100

= 20%

= 100%

2/200 x 100

8/80 x 100

= 1%

= 10%

Example 8

2006

2007

2008

Dividend (cents)

24.3

26.3

27.6

725

885

734

160

(151)

186.3

(123.4)

725

885

=25.7%

=(13.9%)

11%

9%

Capital gain

TSR

ROE

www.studyinteractive.org

193

SOLUTIONS TO EXAMPLES

Example 1

Shares

Price

Sum

Existing

$2.8

$8.4

New

$2.0

$2.0

$10.4

Value of a right

Per new share

$2.6 - $2.0 = $0.6/new share

Per existing share

$2.8 - $2.6 = $0.2/existing share

194

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 2

Tirwen

(a)

Shares

Price

Sum

Existing

$4.00

$20.00

New

$3.40

$3.40

$23.40

Value of a right per existing share

(b)

In

$

Take up rights

Shares

1,000 x $4

Cash

1,000 x 1/5 x $3.4

Total

4,000

Out

$

Shares

1,000 x 6/5 x $3.9

680

4,680

4,680

4,680

Sell rights

Shares

1,000 x $4

Total

4,000

4,000

Shares

1,000 x $3.9

Cash

1,000 x $0.1

3,900

100

4,000

The existing shareholder has two basic options, to take up the shares or to

sell the rights to those shares. If you consider the implications of these

actions above you will notice that the shareholder will be in a neutral position

in both cases providing the theoretical ex rights price is achieved.

www.studyinteractive.org

195

SOLUTIONS TO EXAMPLES

(c)

Current EPS

= $4 15.24 = $0.2625/share

Note changes are:

1

issue shares

expected to remain the same.

Current PAT = $0.2625 x 4m = $1,050,000

(000s)

Before

PBIT

Less Interest

PBT

Less tax

After

2,127.5

12% x 4,500 +

7% x 1,250

30%

PAT

627.5

1,500

$

2,127.5

Reduction of 2,500

(see below)

327.5

1,800

450

540

1,050

1,260

Working

Debt redeemed

Total equity raised

Less issue costs

Debt redeemed

Reduction in interest paid @ 12%

$000s

2,720

(220)

2,500

300

196

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

No worked examples

www.studyinteractive.org

197

SOLUTIONS TO EXAMPLES

CHAPTER 12 VALUATION

Example 1

Growth

2.5 x (1+g)5 = 4;

g (approx.) = 10%

Ke = 6 + 0.6(17 6) = 12.6%

P0 =

4 x 1.10

(0.126-0.10)

Example 2

Growth

g = 4%

Ke = 6 + 0.9(11 6) = 10.5%

P0 =

16 x 1.04

(0.105-0.04)

Example 3

Net Assets less liabilities = 785,000 200,000 = $585,000 (by book value)

Add $50,000 for non-current assets.

Deduct $10,000 for premium on debentures

Net value (585 + 50 10)

$625,000

60% holding

$375,000

Example 4

P/E to use is 10

Earnings available to ordinary shareholders are (320 30) $290,000.

Value is (10 x 290) $2,900,000

Example 5

$300,000 0.125 = $2,400,000

Example 6

Time horizon = foreseeable future; use perpetuity.

Real cost of capital = 10%

Taxation = 30% x (400 150 36 28) = 55.8 p.a.

Free Cash Flow = (400 -150 -36 60 55.8) = $98.2m pa

Total PV of FCF=

$982m

$154m

Value of Equity

$828m

198

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 7

(i)

$825m

(ii)

$1,015m

(iii)

$1,045m

$1,709m

Example 8

MV = 9% 0.06 = 150%

Example 9

Time

Cash

1-4

4

Interest

Redeem

$per 100 NV

7%PVF

$PV

8

100

3.387

0.763

27.1

76.3

103.4

$124.1m

Example 10

(a)

Floor Value Expectation is that investors would recover debt capital.

Time

Cash

1-4

4

Interest

Redeem

$per 100 NV

6%PVF

$PV

7

100

3.465

0.792

24.26

79.20

103.46

$41.38m

(b)

Conversion value would be 16 x $6 x (1.04)4 = $112.31 (>$100)

Expectation is that investors would convert to shares.

Time

Cash

1-4

4

Interest

Redeem

$per 100 NV

6%PVF

$PV

7

112.31

3.465

0.792

24.26

88.96

Total Market Value (113.22% x $40m)

113.22

$45.29m

(c)

Conversion premium (45.29 41.38)

www.studyinteractive.org

$3.91m

199

SOLUTIONS TO EXAMPLES

Example 11

Div = 11% x 50 cents = 5.5

P0 = 5.5 0.06 = 91.7 cents per share.

200

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

CHAPTER 13 RISK

Example 1

(a)

(i)

Selling to the bank; the bank pays lower $ so divide by higher rate:

0.7778

Receipt: 300,000 0.7778 = $385,703

(b)

(ii)

(i)

(ii)

Example 2

1 month: Netting off payment of (515-265) 250,000

Buy paying (250,000 0.7781) $321,295

3 month: Net receipt of 450,000

Sell receiving (450,000 0.7820) $575,448

Example 3

Step 1

450,000 in 3 months time.

Borrow in paying 7.2% x 3/12 = 1.8%

450,000 1.018 =

Step 2

442,348 0.7778 =

Step 3

442,043

$568,325

Amount in 3 months (568,325 x 1.012)

$575,144

The forward contract ($575,448) yields slightly more than the money market.

However, a decision whether Danke Yudle should use the money market would

depend on its ability to (and cost to) borrow in as well as the opportunities it has

for investing the $568,325 to be received immediately.

Example 4

(a)

In three months, the net receipt will be 168,067 (300,000 1.7850)

(Working)

Net off any concurrent receipts and payments ie one month, net payment is

$100,000.

The forward rate to buy dollars is the lower end of the spread, so 1.7826.

www.studyinteractive.org

201

SOLUTIONS TO EXAMPLES

(b)

$300,000 receipt

ie 300,000 1.0135 = $296,004

Note that interest is given annually, so 5.4% becomes 1.35% quarterly

Step 2

166,089

Step 3

168,580

In this case, the money market yields slightly higher income than the forward

market hedge (168,580 compared to 168,067) and so Inshal should use

the money market to hedge the receipt.

(c)

whose value rises or falls in connection with the value of a related asset, in

this case, an amount of sterling stated in US dollar terms.

Inshal would, effectively, be betting that the value of the $300,000 receipt

falls below an amount given today in the futures market (lets say

169,000).

If the worst happens and the receipt on the spot market is only 167,500,

then Inshal has won its bet and will gain 1,500 from the futures market,

giving a net of 169,000.

On the contrary, if the spot proceeds were to be 175,000, Inshal would lose

its bet, costing it 6,000 out of the proceeds, netting it 169,000 again.

The futures market is more complex than illustrated. For instance, we cant

simply bet on $300,000. The market trades in multiples of 62,500 so

Inshall would have to trade in either 125,000 of futures (leaving a portion of

the receipt uncovered by the hedge), or 187,500 (with the potential of losses

or gains on the difference between that amount and the expected receipt

of 169,000). Either way, futures would not completely eliminate risk.

Finally, operating a futures hedge requires financial management staff with

expertise and the availability to monitor the position of the contract daily.

This brings with it additional costs compared to forward market or money

market hedging.

Frankly, anybody suggesting a futures hedge for a sum of only $300,000

should probably stay away from the important financial decisions affecting

Inshal.

Example 5

Now

Interest

+ 1 year

Rate

1,000,000

1.05

1,050,000

0.7774

777,400

1.07

831,818

0.7922

202

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 6

Now

Inflation

+ 1 year

Rate (/$)

10,000

1.0372

10,372

0.7774

7,774

1.057

8,216

www.studyinteractive.org

203

SOLUTIONS TO EXAMPLES

Example 1

Operating cycle

Inventory turnover period

Days

Inventory/Cost of sales x 365

68

30,000/160,000 x 365

Receivables period

Receivables/Sales x 365

88

60,000/250,000 x 365

Payables period

(114)

50,000/160,000 x 365

42 days

Example 2

(a)

(b)

$8m x 0.14

73 days

$1,120,000

Example 3

Cost of financing receivables

Interest cost

50% pay over normal terms $40m x 0.5 x 73/365 x 0.14

50% pay over discounted terms $40m x 0.5 x 10/365 x 0.14

Discount $40m x 0.5 x 0.02

Total cost

$560,000

$ 76,712

$400,000

$1,036,712

Example 4

Interest cost $40m x 50/365 x 0.14

Factor fee $40m x 0.016

Admin savings

Total cost

204

$767,123

$640,000

($175,000)

$1,232,123

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Example 5

($s)

Order quantities

Ordering cost

120,000/500 x $30

120,000/600 x $30

120,000/700 x $30

d/Q x Co

Holding cost

500/2 x $20

600/2 x $20

700/2 x $20

Q/2 x Ch

500

600

700

7,200

6,000

5,000

5,143

6,000

7,000

Total cost

12,200

12,000

12,143

Economic order quantity = 2 x $30 x 120,000/$20 = 600 units

Example 6

($s)

Order quantities

EOQ

Bulk Disc.

600

1,000

Ordering cost

120,000/600 x $30

120,000/1,000 x $30

d/Q x Co

Holding cost

600/2 x $20

1,000/2 x $20

Q/2 x Ch

6,000

3,600

6,000

10,000

Purchase cost

120,000 x $10

120,000 x $9.8

1,200,000

Total cost

1,212,000

1,176,000

1,189,600

Example 7

Reasons for the sharp decline in liquidity

Turnover has increased by 33% from 12,000 to 16,000 with no introduction of any

permanent funds. This will put pressure on the company because it will have to

rely on short-term funding to fund the growth of the business and puts the

company at risk of overtrading.

Increase in receivables

The receivables balance has increased by $1m, or 63%, year on year reflecting

increased level of activity (turnover) but longer collection period. Average credit

taken by customers has increased to 59 days.

www.studyinteractive.org

205

SOLUTIONS TO EXAMPLES

Increase in inventory

Inventory has increased by $0.8m or 57% during the year again as a result of

increased levels of activity and also increased turnover period of inventory. The

average holding period for inventory, as at 2012, is 88 days (2011: 73 days).

Increase in payables

Trade payables have increased by 33% - exactly in line with sales activity which

suggests that there has been no additional reliance on payables as a source of

finance.

High level of dividends

Dividend will be paid out at $1.5m this year and $2m next approximately 40% of

earnings available p.a. This is in spite of high growth.

Liquidity ratios

20X2

20X3

Current ratio

CA/CL x 100

4,500/2,000

2.25

4,900/2,400

2.04

Quick ratio

CA inv/CL

4,500-1,400/2,000

1.55

4,900-2,200/2,400

1.13

The current ratio has fallen suggesting that an increasing level of current assets is

being funded using current liabilities, also the quick ratio has fallen suggesting that

the company is less able to pay its bills as they fall due.

Cash position (net)

20X2

$1.5m

20X3

$($0.1m)

The company has re-invested surplus funds and is now operating a modest

overdraft given its current size and health, Ewden is not over-trading.

Payable days

20X2

78 days

20X3

80 days

The number of days has barely moved which suggests that the company is having

no additional problems paying its bills.

The credit period of nearly three months may suggest that the company is

consistently abusing its credit terms which may lead to problems with suppliers

over the longer term.

Example 8

(a)

206

Spread

=

3( x $50 x $250,000/0.0005)1/3

$7,970

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

(b)

(c)

Maximum level

=

$25,000 + $7,970

$32,970

Return point

=

$27,657

Example 9

(a)

(b)

=

2 x $50 x $60,000/0.06

$60,000/$10,000 = 6 transactions per annum

Example 10

($000s)

1

Receipts

Payments

Interest on traded bonds

Capital expenditure

Net cash flow

Overdraft interest (0.5%)

Net cash flow

6,530

(5,040)

Month

2

5,300

(4,750)

(200)

3

4,300

(4,600)

(1,000)

1,490

(10)

350

(1,300)

(3)

(1)

1,480

347

(1301)

Balance b/f

(2,000)

(520)

(173)

Balance c/f

(520)

(173)

(1,474)

Reduction in the balance of accounts receivable per day (ie increase in cash)

$60,500,000 x 1/365 = $165,753 $166,000

Reduction per month

$166,000 x 18 days 4 months = $747,000

www.studyinteractive.org

207

SOLUTIONS TO EXAMPLES

($000s)

Receipts

Payments

Interest on traded bonds

Capital expenditure

Reduction in receivables

Net cash flow

Overdraft interest (0.5%)

Net cash flow

Balance b/f

Balance c/f

6,530

(5,040)

Month

2

5,300

(4,750)

(200)

3

4,300

(4,600)

747

747

(1,000)

747

2,237

1,097

(553)

(10)

2,227

0

1,097

(2,000)

227

0

(553)

227

1,324

1,324

771

Example 11

(a)

Existing position

Current contribution

$7m x 0.55

$7m x 45/365 x 8%

Total

$3,850,000

($69,041)

$3,780,959

Working

Revised sales revenue

$7m x 1.08

$7,560,000

Revised contribution

$7.56m x 0.545

$4,120,200

35% Discounted terms

$7.56m x 0.35 x 20/365 x 8%

($11,599)

$7.56m x 0.65 x 65/365 x 8%

($70,008)

Discount

$7.56m x 0.35 x 0.014

($37,044)

Total

$4,001,549

profitability.

(b)

208

Spread

=

3( x $50 x $1,000,000/0.00025)1/3

$15,940

www.studyinteractive.org

SOLUTIONS TO EXAMPLES

Maximum level

=

$2,000 + $15,940

$17,940

The maximum level of cash allowed if this balance is breached then a control

action will invest an amount equal to the maximum level minus the return

point.

Return point

=

$7,313

The balance to which the cash balance will return to after a control action.

www.studyinteractive.org

209

- Sensitivity analysisÎncărcat derastogi parag
- Diamond Chemicals Group 5Încărcat deGressiadi
- ACCA p3 ModelsÎncărcat deImranRazaBozdar
- Summary of Capital Budgeting Techniques GitmanÎncărcat deHarold Dela Fuente
- ACCA F9 Notes by Seah Chooi KhengÎncărcat deHuzaifa Ahmed
- MANAGING FINANCEÎncărcat deShaji Viswanathan. Mcom, MBA (U.K)
- F9 RM QuestionsÎncărcat deImranRazaBozdar
- MOOC Session 5-ReadingÎncărcat deMaruthi Ram
- Acca f9 NotesÎncărcat deMuhammad Khurram
- ACCA P4 NotesÎncărcat deTanim Misbahul M
- invst1Încărcat deVincent Murphy
- Capital BudgetingÎncărcat deRavi Verma
- Capital Budgeting(II Sem) FMÎncărcat dePallavi Shivram B S
- Capital BudgetingÎncărcat deNillz Afnan
- capitalbudgeting-2011Încărcat declaudine_tayona
- project apprisalÎncărcat deswa3
- ffm911Încărcat deHarry Satria Putra
- Net Present Value and Other Investment CriteriaÎncărcat deHanniel Madramootoo
- Mba Fm Module Assignment 2Încărcat deAlex Huesing
- Investment Decison Rules and ApplicationsÎncărcat deFrancis Grajales
- Faufi FertilizerÎncărcat deAnonymous IMA0fA
- Feasibility FinancialÎncărcat desyi
- Accounting InformantionÎncărcat desauravwow
- NPV Vs IRR (1)Încărcat deVijender Singh
- Chapter 14Încărcat dejhouvan
- 9780273713654_pp08Încărcat deDyas Aryani Putri
- CAPITAL BUDGETING National Mineral Development CoorporationÎncărcat deSagar Paul'g
- f2 Investment AppraisalÎncărcat deCourage Kanyonganise
- Capital Budgeting Introduction Hand OutÎncărcat deLaghari Shafquat
- Capital BudgetingÎncărcat deEunice Cristina Angela Ereño

- Down by the RiversideÎncărcat deflavioregis
- Games for Bridal ShowerÎncărcat deIan Bob-Williams
- Ancient WordsÎncărcat deIan Bob-Williams
- House PlanÎncărcat deIan Bob-Williams
- Notion 6.3 User Guide en 12072017Încărcat deIan Bob-Williams
- RoiÎncărcat deIqbal Santosa
- 17-Icon-Bay-Floor-Plan.pdfÎncărcat deIan Bob-Williams
- ACCA-AAA-S18-Notes.pdfÎncărcat deAhmer Ahmed
- 2017 BPP PASSCARD F6.pdfÎncărcat deZeng Binger
- Sample-Audit-and-Assurance-Program-in-5-Steps_res_eng_0316.pdfÎncărcat deIan Bob-Williams
- P123.pdfÎncărcat deIan Bob-Williams
- P7 Technical ArticlesÎncărcat deIan Bob-Williams
- DoD ItÎncărcat deIan Bob-Williams
- Mx ML T24MX Part 2 EnÎncărcat deali
- DoD-ESI_Self-Audit_Checklist.pdfÎncărcat deIan Bob-Williams
- !P7 Audit and Assurance Summary -1- 20 PagesÎncărcat deckomaromi776
- i-131Încărcat dehey_hop
- IT General Controls IcqÎncărcat deIan Bob-Williams
- 352913914-You-Deserve-It-Hairston.pdfÎncărcat deHouston Nelson
- Here I Am to Worship.pdfÎncărcat deIan Bob-Williams
- IT_general_controls_icqÎncărcat deYuyu Yc
- Network+ Study GuideÎncărcat deIan Bob-Williams
- Business Combinations Revised Part 2Încărcat deIan BobWilliams
- The Gallant Seventh March.pdfÎncărcat deIan Bob-Williams
- SBR Mock GuideÎncărcat deIan Bob-Williams
- Notion_6.3_User_Guide_EN_12072017.pdfÎncărcat deIan Bob-Williams
- jss1 1st term mathsÎncărcat deAigbagenode Hope Omozuavbo
- JSS 1Încărcat deIan Bob-Williams
- The Gallant Seventh MarchÎncărcat deIan Bob-Williams

- mmltdÎncărcat dejinaljain25
- Lehman Brothers1Încărcat deNikharAgrawal
- Land and BuildingÎncărcat deHannah Oros
- Metropolitan Bogor, Tangerang, And Bekasi Urban Development Sector Project in IndonesiaÎncărcat deIndependent Evaluation at Asian Development Bank
- US Internal Revenue Service: p393--2003Încărcat deIRS
- Muthoot Fincorp Limited.docÎncărcat deDawn Davenport
- Guidelines Commercial PaperÎncărcat deAwais Romi
- 1561228354120YvP9sRPyisr1smg2.pdfÎncărcat deRohit Kumar Das
- FIN3010 Banking and Credit Review NotesÎncărcat deJimmy
- All About Ms ExcelÎncărcat deknorr
- CIA Answers to Sample QuestionsÎncărcat deAlexandru Vasile
- PPT Presentation 2012Încărcat delemonbandit
- CDO Squared 4Feb05Încărcat dejbl91
- Instant Start UpÎncărcat dedd12420007358
- final copy of american dream essayÎncărcat deapi-332150965
- Capital GainÎncărcat deAbhishek Singh
- SA20190515(1).pdfÎncărcat deMitess Boñon Brusola
- The City MagazineÎncărcat deLorena Castañeda
- Pre Shipment FINANCEÎncărcat deaniket7777
- Tirupati SCPÎncărcat deRamesh
- Se 307-Chapter 5 Present Worth AnalysisÎncărcat deAiman Syazwan
- Oblicon Digest (Princess)Încărcat dePaul Arman Murillo
- Swift MT 760 & MT 799Încărcat deLincoln Reserve Group Inc.
- Reynaldo p. Floirendo, Jr., V. Metropolitan Bank and Trust CompanyÎncărcat deAnjelli Mika Masa
- Sadlier WH 2009 Annual ReportÎncărcat deteriksen
- INVESTMENT AND FINANCIAL PLANINING FOR RETAIL INVESTOR”.docx (1).docÎncărcat deprathamesh kadu
- Raymundo vs BandongÎncărcat deDon Ycay
- Financing Card Based on Murabahah Contract: The Legal Implications on a Credit CardÎncărcat deIJELS Research Journal
- DIC-2: Driver Responsibility Program PamphletÎncărcat demy3019
- National Accounts a Practical IntroductionÎncărcat deAsma Ahmed

## Mult mai mult decât documente.

Descoperiți tot ce are Scribd de oferit, inclusiv cărți și cărți audio de la editori majori.

Anulați oricând.