a

Ke
rf 4%
rp 5.60% only market return to be deducted. Risk premium= market return - risk free rate.
be 1.25
ke 11.00%

kpref
dividend $ 0.05
kpref 9.09%

kd loan notes
interest $ 6.40

0 1 2 3 4 5 6
108.29 -6.4 -6.4 -6.4 -6.4 -111.4
kd loan no 5.36%

kd bank lo 5.6%

ve $ 254,000,000 10.56%
vpef $ 2,200,000 0.08%
VD loan no $ 6,497,400 0.13%
vd bank loa$ 2,000,000 0.04%
$ 264,697,400

WACC 10.80%

b) term business risk and financial risk

business risk - cant control
-systematic risk, in which the return epected by shareholders from
business operation
-business risk does not affected by company level og gearing
-can be measured from a statement of profit or loss which is by
operating profit. sbb pat-interest is for loan. net profit will include
interest. will affect gearing.

financial risk
-unsystematc risk, in which return expected by shareholders from the
company financed themselves.
-financial risk will be affected bycompany level of gearing. the higher
gearing, the higher fiancial risk.
-can be measured from statement of profit or loss related to interest
cover and net profit.

right issue price and cumulative right price.

price in which the rigt issue is offered at. the sahre proce right after right
issue announcement its called cum rights price.

theoritucal ex-rights price (terp)

c) right issue price and cumulative right price.
price in which the rigt issue is offered at. the sahre proce right after right
issue announcement its called cum rights price.

theoritucal ex-rights price (terp)

theoritical price after the right issue. weighted average of cum right price
and right issue price.

pre-emptive rights of shareholders.

preserve the balance of ownership and control in company.

underwritten share
in order to ensure that company receives funds needed, right issue are
usually underwritten.

value of a right
the price te right can be sold (TERP-issue price). value of right per
existing share - the number of right divided by no of shares that need to
be possesssed.
rn - risk free rate.
a)
year 0 1 2 3 4 5
production unit 850000 850000 850000 850000
selling pric 3% 3.1 3.193 3.28879 13.7899 59.14197
sales revenue 2714050 2795472 11721412 50270675
vc 6% 1.1 1.17 1.24 1.31 1.39
variable cost -991100 -1050566 -1113600 -1180416
fixed cost -110000 -205000 -330000 -330000
taxable cf 1612950 1539906 10277812 48760259
tax 20% -322590 -307981.1 -2055562 -9752052
tax save on 20% 1600000 1200000 900000 675000
initial investment -3200000
after tax cf -3200000 1612950 2817316 11169831 47604696 -9077052
df 10%
npv 35865250

npv is positive hence the project is financially viable.

b) project initial investment npv pi rank

A 3000000 6000000 2 2
B 2000000 3200000 1.6 4
C 1000000 1700000 1.7 excluded (mutually exclusive with E)
D 1000000 2100000 2.1 1
E 2000000 3600000 1.8 3

optimum investmum schedule

project initial investment npv cum
based on r D 1000000 2100000 6000000
A 3000000 6000000 3000000
E 2000000 3600000 1000000
B 1000000 1600000 prorate
7000000 13300000

npv of the optimum investment schedule will be $13300000

c) hard capital rationing

-external reason that affect the availability of finance.
-proviiders of finance may find it too risky to invest in the
company
-long term finance may also be unavailable due to poor economy
or banking crisis.

soft capital rationing

-limited source of finance due to internal reason
-company wants to avoid diluting existing EPS and loss of
ownership due to new shares issue
-company may wish to purusue controlled growth instead of
rapid growth.
-company may create a pool of fund in order for departments to
present the best projects idea.
 -company wants to avoid diluting existing EPS and loss of
ownership due to new shares issue
-company may wish to purusue controlled growth instead of
rapid growth.
-company may create a pool of fund in order for departments to
present the best projects idea.

d) probability analysis
-risk can be assessed or quantified by attaching too probabilities
to expect investment project outcomes.
-probability can be attached to 2 or more expected scenarios,
hence key projects variable may take different values depending
on economic state.
-assigning probabilities can be highly subjective
-an investment may be one-off and the expected NPV may never
actually occur.

CAPM
an element in CAPM calculation, beta equity, represents the
systematic and unsystematic risk that is carried by a project and
business as a whole
- if the company want to operate in new product area, the need
to find a proxy company and ungeared their equity beta to
eclude their gearing.
-ungerared equity beta, or called as asset beta represent
systemmatic risk.
-the asset eta will then be regeared using our company's
gearing include unsystematic risk- risk that
TAD
1 2 3 4
balance bf 32000000 24000000 18000000 13500000
TAD 8000000 6000000 4500000 3375000