Professional Documents
Culture Documents
Fm-Nov-Dec 2011
Fm-Nov-Dec 2011
Nov-Dec 2011
1.
·1
The NPV is negative; therefore RA's management should not proceed with the investment proposal. The
investment will not enhance shareholders' wealth.
Workings:
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2014: 478,224 x 1.08 516,482
sales
Working Capital 231,000 266,805 308,106 -
Working capital - (injection)/release (231,000) (35,8050 (41,355) 308,160
I 8,73,767
So, ignoring the impact on working capital, if sales volume is 14.4% lower than estimated, the NPV will
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be Negative and RA could not proceed with e investment.
l(d): Time value of money concept has been considered while discounting cash nows, Interest expenses
on borrowed fund will be dealt with as part of weighted average cost of capital, Hence, interest
payments will be ignored.
It refers to the ability of the company to generate value and increase shareholders wealth, Value of the
is
business the total present value of all activities. A business has following 7 value divers:
l, Life of projected cash flows
2. Sales growth rate
3. Operating profit margin
4. Corporate tax rate
5. Investment in noncurrent assets
6. Investment in working capital
7. Costs of capital
The value of the business is calculated from the cash flows generated by the drivers # 1-6 which are then
discounted by the driver # 7, In the case of RA, all of the seven value drivers are relevant and are used in the
calculation. RA's 3 years strategy of expanding its solar panel market.
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., share
.16.75m = 16,/50,000 = Tk. 1,771,549
5 -0.13) 9,455 " NPV
·t hedge NPY
Answer to
ct produces a higher taka receipt than the money market hedge. Both of these hedging
ice a fixed taka amount, known at the start of the hedging period. (a) Fir
(i)
d for is accurate then it would be better to not hedge at all as the spot rate in twelve (ii;
produce a taka receipt of Tk.1,77 4, 364. If the current spot rate remains constant (iii
n mind the comparative interest rates in Bangladesh and Norway) this would produce (iv
a receipt of Tk. 1,796,246. However, if the future spot rate is 9.53 (as per the question)
Tk. 1,757,608 i.e. worse than the forward contract. Con
()
the strike price of 9.30NK/fk. produces an attractive amount of taka Tk. 1,775,000 and (ii)
1t consider paying the Tk. 25,000 premium and also have the chance to benefit from a (iii
in December 2012. At a future spot rate of 9.23 (as per the question) the option would (iv
1 a receipt of (Tk. 1,814,735 - 26,075) Tk. 1,788,660.
I The
hedging and its effectiveness I Cor]
(i)
Effectiveness (ii)
fethods of hedging
• It will fix the rate of interest receivable by DDS. Upside (iii
RA
potential is therefore removed.
• It can be tailored to the exact amount to be invested by 1 (iv
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J
-
DDS
. ,
\.
.. - I®gl
-
(ii) Interest rate future I
DDS would buy interest rate futures, but these are for
standardised amounts, which could be impractical.
(iii) Interest rate option I DDS would have the right to deal at an agreed interest rate
at maturity date, i.e. March 2012.
p
DDS would buy tradcd call options, but these arc for
standardised amounts anJ may not be suitable.
I
For more flexibility, DOS could purchase a tailored over
the counter (OTC) option.
(iv) Interest rate swap I
It would be impractical as a long term hedge for a large
deposit
• The hedge is only for six months. it would be difficult to
find a counterparty.
Assumptions used:
Ci The dividend valuation model has been used to calculate the cost of capital because there is no debt
and the firm is all-equity financed.
Ci The dividend growth rate is determined by using the Gordon growth model.
Ci The proposed expansion has no consequent change in business risk so that the current cost of equity
capital is appropriate. Tk. 4 per share is a recent valuation and is therefore approximate to current
market value
b) Advantages & Disadvantages of right issue to fund proposed expansion:
i) Right issue:
Advantage • No change in control if fully taken up by existing shareholders
• Flexible nature of dividend payments as opposed lo a fixed interest
commitment
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• Any new sharchw\ders might find the fi±:i's unlisted status unattractive
• No listing and reporting :equirements
Lisadvantage • Hov» will existing shareiiaers react and do they have access to the
required funds?
•ii) DSE Iistl;:
Advantage • No change in control if fully taken up by existing shareholders.
a Flexible nature of dividend payments as opposed to a fixed interest
coninitment
• Any new shareholders might find the firm's unlisted status unattractive
• No listing and reporting requirements
Disadvantage • Lengthy process
• Listing and reporting requirements
• Cost involved
• Dilution of control
(c) ( i)
• HH would obtain finance at a lower rate of interest than an ordinary bank loan, provided that the
firm's prospects were considered to be good post-expansion.
• This might encourage future outside investors with the prospect of a future share in profits.
= This would also introduce an element of short-term gearing, with potential' beneficial cost of capital
implications.
• If the debt was subsequently converted it would also avoid subsequent redemption problems
II I{ the debt was subsequently converted it would enable HI-I to issue equity relatively cheaply
• There may be an argument that a convertible loan would come with fewer covenants than a bank loan
(ii)
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