SECTION 1: SHORT ANSWER PROBLEMS
Retained earnings for Vindaloo’s 2003.
|Retained Earning 2002||400|
|Less : Loss during The year||40|
|Less : Divided pay out||60|
|Retained Earning 2003||300|
|Total Assets||$ 75.00|
|8% ROA||$ 6.00|
|(Total Assets * ROA = 75*(8/100) = 6)|
|Total Sales||$ 100.00|
|Profit Margin||$ 6.00|
|(Profit / Total Sales = )|
|(Total Assets/ equity multiplier)|
|Debt Equity ration constant|
|ROE* Retention Retio||0.04|
|1-ROE* Retention Retio||0.96|
No, brother in law assignment is not violation of market efficiency; this indicates that Brother in law has taken much higher risk than the average market. If it suits him so be it (Preda, 2009).
This could also indicate that the Brother in law had some good market tips and exited at most opportune time without hanging around with the stocks.
For calculating Ear, formula is
Where EAR=Effective annual rate
K=Nominal interest rate
M=Compounding frequency per year (Randall, 2007)
Lets calculate Nominal rate of interest.
NOMINAL RATE OF INTEREST= (difference in total amount paid per year/total amount paid)/100
[ 4160-3000=1160 For 2 yrs = 580 per yr]
Putting value in EAR we get
EAR = (1+19.33/52) – 1
Solving this we get EAR= 21.2812 %
|Year||Project I||Project II|
|Payback (yrs.)||2.053 Year||1.92 Year|
|Discounted Payback (yrs.)||2.44 Year||1.25 Year|
|PROJECT A||PROJECT B|
|Cash inflow||cumulative cash inflow||Cash inflow||cumulative cash inflow|
Payback period = 2 yrs + [18000-17500 / (27000-17500)]
= 2.053 years
Payback period = 1 yrs + [12000-6500/ (12500-6500]
= 1.92 years
|PROJECT A||PROJECT B|
|Cash inflow||Discounted fector (11%)||cumulative cash inflow||Cash inflow||Cash inflow||Discounted fector (11%)||cumulative cash inflow||cumulative cash inflow|
Discounted Payback period = 2 yrs + [18000-14962 / (21907-14962)]
= 2.44 years
Payback period = 1 yrs + [12000-10725/ (15843-10725]
|year||cash inflow||discounted factor@15%||discounted cash inflow||discounted factor@16%||discounted cash inflow||discounted factor@14%||discounted cash inflow|
|IRR using interpretation formula Project A = 15% – (18000-15113.17/ 20047-15113) = 15% – 0.5851 = 15.415%|
|year||cash inflow||discounted factor@28%||discounted cash inflow||discounted factor@29%||discounted cash inflow||discounted factor@30%||discounted cash inflow|
|IRR using interpretation formula Project A = 29% – (12000-11900/ 12080-11900) = 29% – 0.556 = 28.44%|
|Assets||Amount||25%||90% capacity of acutal|
|long term Debt||350||434||477|
|Reserves and Surplus||0||66||47|
|Particulars||Amount||25%||90% of actual|
Effect of increase in 25% sasles is already given in the table above.
As menationed in question, 40% is retained.
So retained profit=165*40/100=66 (add as reserves and surplus to liability)
Now if we balance both sides we get Long Term debt = $ 434
So total external financing need is $434.
In this case, looking at figures in above calculation, external financing will increase from $434 to $477 due to decrease in working capacity. Since amount of profit retained is less, the firm has to maintain more external financing to meet its requirement.
Lets find debt equity ratio.
|Debt-to-Equity Ratio =||Total Liabilities|
= 800/250 = 3.2
Looking at the calculation above, there can be no change in total liability or equity amount as debt equity ratio is to be maintained. So any change to be made in liability side can be only done through change on long term debt. As plant is already operating on 100% capacity, the maximum possible sale is $800
The managers of Magma International, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. Cetain values are given. We will calculate following things
1) Depreciation tax shield in the third year for this project (Nissim, 2002).
CCA at 30% = Machinery Cost*30%
Depreciation tax shield = Machinery cost- CCA
|Machinery cost||CCA @30%||Depreciated Tax shield|
2) Present value of CCA tax shield
|Machinery cost||CCA @30%||Depreciated Tax shield||Discounting Factor||Present value of Cca tax shield|
Discounted Value @ 12% = 1st year = 1/1.12
= 2nd yr = 1st year discounted rate/ 1.12
3) the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation
|price of machine||800000|
|cost for block||125000|
|less salvage value||150000|
|less depreciation @30%||630000|
From above table, the firm has to bid a minimum amount of $850500. It can add industry profit to it and bid accordingly.
4) NPV of this project
|Year||Profit||Depreciation||PBT||PAT||Disc Factor @ 8%||PV of Cash Profit|
|Total PV cash profit||132475.5255|
|Salvage of plant & machinery||150000|
|Net cash Inflow||-17524.47454|
Cost of Equity = (Next Year’s dividends per share / Current market value of stock) + Growth rate of dividends
= (1.8/8)+4% = 6.17%
Cost of equity = 6.17 %
Cost of equity = rf + Bs(Emkt – rf)
Where: rf = the risk-free rate
Bs = the beta of the investment
Emkg = the expected return of the market
Here cost of equity = 4+ 1.2 (12-4) = 13.6 %
The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.
SO here in this case, Cost of Preferred stock = (1.8/83)+12 = 12.01
1- (Company tax rate/100) = 0.66
Pre tax costing = (400000*83)/.66 = $50303030
In financial decision making, financing of firm’s assets is done by either debt or equity. The weighted average cost of capital (WACC) measures the average riskiness of a firm’s assets by calculating the weight of debt and equity to any given situation. In effect, by calculating a weighted average, a firm can estimate the capital discount of debt and equity in dollar terms.
Formula for this is
WACC = Wd x Rd(1-T) + Ws x Rs + Wp x Rp
So for this case, percentage of equity allocated to finance the project = (total equity allocated/ total amount of financing)*100
the cost of financing will have effect of floatation cost at 5% will will affect equity.
Current capital structure is optimal
Breakeven ppoint = Available Retained Earnings = 800000/10 = 80000
Equity Percentage of Total