Chapter: 2 & 3 Investment Appraisal & Risk and decision making May June 2012 >\1. (a) What is capital rationing situation? What are the methods used to select capital investment projects ~ under capital rationing situation? State the steps to be followed to select a project? 5 (b) Raihan has been working as a Financial Analyst in Trans Group. Finance Director of the company advised him to evaluate following capital investments, project X and Y. Each project has initial cost 6f Tk. 1,000,000. The cost of capital for each project is 15 percent. The projects’ expected net cash flows will be as follows: 20, Year Project X Project Y Taka Taka 0 (1,000,000) (1,000,000), 1 650,000 350,000 2 300,000 350,000 3 300,000 350,000 4 100,000 350,000 Cash flows of project *X’ are expressed in real terms while those of project *Y’ are expressed in nominal terms. ‘The appropriate inflation rate is 4%. Required: i) Calculate each project's payback period, Net Present Value (NPV) and Internal Rate of Return (IRR). ii) Which project or projects should be accepted if they are independent? iii) Which project or projects should be accepted if they are mutually exclusive? iv) How might a change in the cost of capital (K’) produce a conflict between the NPV and IRR ranking of these two projects? Would this conflict exist if K’ were 5%? ~ =) Nov-Dec 2012 1 (a) What is modified internal rate of return (MIRRJ? State the advantages and disadvantages of MIRR in capital budgeting decision. 4 (b) What is ‘playing the float’ in cash management and how it impacts on working capital management? 3 (c) Bela Ltd. is a profitable company which is financed by equity with a market value of Tk.180 million and by debt with a market value of Tk45 million. The company is considering two investment projects, as follows: Project A ‘This project is an expansion of existing business costing Tk345 million, payable at the start of the project, which will increase annual sales by 750,000 units, Information on unit selling price and costs is as follows: Solling price : Tk.2:00 per unit (current price terms) Selling costs : Tk.0 04 per unit (current price terms) Variable costs : Tk.0 80 per unit (current price terms) Selling price inflation and selling cost inflation are expected to be 5% per year and variable cost inflation is expected to be 4% per year. Additional initial investment in working capital of Tk.250,000 will also be needed and this is expected to increase in line with general inflation. Project B ‘This project is a diversification into a new business area that will cost ‘Tk million, A company that already operates in the new business area, Gazi Ltd. has an equity beta of 1.5, Gazi Ltd. Is financed 75% by equity with a market value of Tk.90 million and 25% by debt with a market value of Tk.30 million. Other information Beta Ltd. has a nominal weighted average after-tax cost of capital of 10% and pays profit tax one year in arrear at an annual rate of 30%. The company can claim capital allowances (lax-allowable depreciation) on a 25% reducing balance basis on the initial investment in both projects. Propared by: Pankaj Chandra Bhovmick Eval: BhownichO14@yinail com, Mob:O1677693737> 9 oss eS eg vs Ves Risk-free rate of return : 4% “es Equity risk premium : 6% Sa General rate of inflation : 45% per year ~ Directors’ views on investment appraisal: The directors of Beta Ltd. require that all investment projects should be evaluated using either payback period or return on capital employed (accounting rate of return). The target payback period of the company is two years and the target return on capital employed is 20%, which is the current return on capital employed of Beta Ltd. A project is accepted if it satisfies either of these investment criteria The directors also require all investment projects to be evaluated over a four-year planning period, ignoring any scrap value or working capital recovery, with a balancing allowance (if any) being claimed at the end of the fourth year of operation. Required: a) Calculate the net present value of Project A and advise on its acceptability if the project was to be Appraised using this method. b) Critically discuss the directors’ views on investment appraisal. ¢) Calculate a project-specific cost of equity for Project B and explain the stages of your calculation. 2 (a) Explain the term with specific example in each case (a) Real Option (b) Option to delay (c) Option to expand (d) Option to abandon (¢) Option to redeploy. May June 2013, 3. (a) Why cash flow is preferred rather than profit in investment appraisal? 3 (b) How taxation affect the investment decision? Discuss with two examples. (©) ABC Ltd. is considering an investment in new technology that will reduce operating costs through increasing energy efficiency and decreasing pollution. The new technology will cost Tk1 million and have a four-year life, at the end of which it will have a scrap value of Tk.100,000. A licence fee of Tk.104,000 is payable at the end of the first year. This licence fee will increase by 4% per year in each subsequent year. The new technojogy is expected to reduce operating costs byTk5 80 per unit in current price terms. This reduction in operating costs is before taking account of expected inflation of 5% per year. Forecast production volumes over the life of the new technology are expected to be as follows: Year 1 2 3 4 Production (units per year) 60,000 75,000 95,000 80,000 If ABC Ltd. bought the new technology, it would finance the purchase through a four-year loan paying interest at an annual before-tax rate of 8:6% per year. Alternatively, ABC Ltd. could lease the new technology. The company would pay four annual lease rentals of Tk.380,000 per year, payable in advance at the start of each year. The annual lease rentals include the cost of the license fee. 5 If ABC Ltd. buys the new technology it can claim capital allowances on the investment on a 25% reduting balance basis. The company pays taxation one Year in arrears at an annual rate of 30%. ABC Ltd. has an after-tax weighted average cost of capital of 11% per year. Required: (a) Comment on whether ABC Ltd. should lease or buy the new technology. (b) Calculate the net present value (NPV) of buying the new technology and advise whether ABC Ltd should undertake the proposed investment. (©) Discuss how an optimal investment schedule can be formulated when capital is rationed and investment projects are either: (}) divisible; or (i) non-divisible. Prepared by: Pankaj Chanda Bhowmick E-mail: bhow mick OMA@igranilcory, Mob:01677693737V- Dec 2013 1. (a) “Relevant cash flow differs from the normal cash flow" explain the SL _(b) Asa financial expert, you are reviewin information is provided to you. ‘The project to date has cost of Tk. 15,00,000. ference. 2 1g an ongoing research project. The following cost and revenue 1 proceeded with the project it will be completed within one year, when the results are to be sold to a government agency for Tk. 30,00,000. The following additional expenses are required to complete the project: Materials: A toxic material has just been purchased at a cost of Tk. 60 Project, it must be disposed off at a cost of Tk. 50,000. Labour: Skilled labour is not easily avail production department, and at a recent 10,000. If this material is not used in this lable. The workers concerned were transferred to the project from a mecting the production manager claimed that if these people were returned to him they could generate sales of Tk, 15,00,000 in the next year. The prime cost of these sales would be Tk. 10,00,000, including Tk. 4,00,000 for the labour cost itself. The overhead absorbed into this production would amount to Tk. 2,00,000. Research staff: It has already been decided that, when work on this project ceases, will be closed. Research wages for the year are Tk.600,000, and the redundancy and severance pay has been timated at Tk.150,000 now, or Tk. 350,000 in one year's time, Equipment: The project utilitizes a special microscope which cost of Tk. 180,000 thee years ago. It has a residual value of Tk, 30,000 in another two years and a current disposal value of Tk. 80,000. If used in the Project itis estimated that the disposal value in one year’s time will be Tk. 60,000. Building services: The project is charged with Tk. 350,000 per annum to cover general building expenses Immediately the project is discontinued, the space occupied could be sub-let for an annual rental of Tk. 70,000. the research department Requirement: You are to work out the relevant cost and revenue and advise the manage: -ment whether to proceed with the project. i Foods Lid, is considering investing in an ice cream plant to operate for the next four years. Alter that time the plant will be worn out, and Gemini, the owner of the company, wishes to retire in any case. The plant will cost Tk. 5,000,000 and is expected to have no realizable value after four years. If worthwhile Ue plant will be purchased at the end of an accounting period, Tax depreciation at the rate of 25% per annum will be available in respect of the expenditure. Revenue from the plant will be Tk. 7,000,000 per annum for the first two years and Tk. 5,000,000 per annum thereafter, Incremental costs will be Tk. 4,000,000 per annum throughout. You may assume that all cash flows occur at the end of the financial year to which they relate. Assume Gemini Foods Ltd. pays corporate tax at 40% and has a cost of capital of 10%. Require (a) Advise Gemini Foods Ltd, whether or not to proceed with this investment in the lee cream plant. (b) Show what difference it would make if the plant were to be purchased and sold at the beginning of the accounting period. Comment on the wisdom of disposing of an asset on the first day.of an accounting, period. Prepared by: Pankaj Chanda Bhowmick E-mail: phowniickO1s"pmail. com, Mobi016776937375 May June 2014 3. (a) Toyota Motor Corp, like most major multinational corporations, enjoys easy access to world financial markets. Explain v (b) The directors of ABC Ltd are considering the ‘The cash flows expected to be associated with each project are as follows: why the NPV approach is the most appropriate tool for Toyota's investment project selection process. selection of one of a set of three mutually exclusive projects Cash flows (TK 000) Project Immediately After 1 year After 2 years After 3 years us +4,000 +4,000 +4,000 B +6,000 +3,000 +3,000 c -10,000 +1,000 +1,000 +13,000 a ee or any other resource to be in short supply during the next three years. . You are required to: (i) Calculate the present value and estimate the internal rate of return of each of the three projects 9 (i) Advise the directors of ABC Ltd which project to accept, explaining fully the reasons for yous advice. 6 fii) Prepare a statement showing how.the net present value and internal rate of return methods may be adjusted so that they lead to consistent recommendations, 5 ¢. Anefficient firm employs inputs in such proportions that the marginal product/price ratios forall inpuls are ies that the marginal cost of debt should equal the marginal cost equal. In terms of capital budgeting, this imp! ractice, firms often issue debt at interest rates substantially below of equity in the optimal capital structure. In p} the yield that investors require on the firm’s equity shares. Does this mean that many firms are not operating with optimal capital structures? Explain Nov- Dec 2014 2.(a) rofitable company. The company is based in Sylhet and has just von a contract to supply gas to the Power Development Board (PDB). In this regard, the company planned to commission a 35-kilometre pipeline at a cost of Tk.260m to enable it execute the contract. The pipeline, Wwhen installed, will carry the gas to an agreed location under the control of PDB. it is expected that the sales of the company will increase from the ‘The anticipated revenue from sales to the PDB is expected! to be Bianibazar Gas Limited is a fast growing P With all these arrangements in place, present Tk. 360m to about Tk. 1,100m. ‘Tk.120m per annum. Apart from this contract, the pipeline willing customers in the suburb. The sales from this source d considers the useful life of the pipeline to be 20 years. The 4.17% per annum: her could also be used to transport Liquified Natural Gas (LNG) to ol are put at Tk. 80m per annum. ‘Phe management of Bianibazar Gas Limite« financial manager estimates a profit to sales ratio of 20% per annum for the first 1? years an for the remaining life of the project. The project isnot likely to have any salvage value Bianibazar Gas Limited is located in a remote area and hence would enjoy exemption fx cost of capital is 15%. Required: {i What is the project's payback period? (ii) Advise Bianibazar Gas Limited giving reasons as t criterion, {iiiy Compute the project's ‘om tax. The company’s 0 the acceptability of the project based on the payback NPV and IRR and advise the company based on calculations Pankaj Chandra Bhowmich Prepared by Eu Mob:016776937.37 E-mail: bhowmick0l4@gmailcom, & &/ # June 2015 (8) Maricom Ltd is considering whether to set up a division in order to manufacturea new product, the roma Kit. The following statement has been prepared, showing the projected profitability per unit of the new product. Selling Price 22.00 Less Direct labour 5.00 ‘Material 3 kg @Tk.1.50 per kg 450 Variable overheads 2.50 (12.00) Net contribution per unit 1000 Itis expected that 10,000 Aroma Kits would be sold each year at the above selling price. Demand for Aroma Kits is expected to cease after five years. Direct labour and material costs would be incurred only for the duration of the product. Other overheads have been calculated as follows: Tk. Rent 8,000 Salary 5,000 Manufacture of the Aroma Kit would require a specialized machine costing Tk.250,000. . The cost of capital of Maricom Ltd is estimated at 5% pa in real terms, Assume all costs and prices given above will remain constant in real terms. All cash flows would arise at the end of each year, with the exception of the cost of the machine which would be payable immediately Requirements: ~ ()) Prepare net present value calculations, based on the estimates provided, to show whether Maricom Ltd should proceed with the manufacture of Aroma Kits. 5 (i) Prepare a statement showing the sensitivity of the net present value of manufacturing Aroma Kits to errors of estimation in each of the three factors: material per unit, annual sales volume and product life. (ignore taxation) Nov Dec 2015 @ 1. @) Explain why the following statements appearing in the objectives of two well known listed companies are not necessarily contradictory? “We never confuse why we exist - to create the maximum possible returns to our shareholders.” “In everything the company does, it is committed to creating wealth always with integrity, for our employees, customers, suppliers and the community in which we operate.” 4 (b) Do you agree that the best external measure of sharcholder wealth maximization is growth in earning per share (EPS)? Why or why not? (0 entity six value drives on which a business can focus to increase its shareholders wealth, 6 (9) "Tracking Limited (TL) manufactures and sells Global Positioning System (GPS) devices. Following favourable market research that cost BDT. 500,000, Tracking, Limited has developed a new GPS based Vehicle Tracking System (VTS). It intends to sef up a manufacturing facility in Bangladesh, although the board of TL ZB had contemplated setting up in an overseas country. The VTS projet will have aif} offour years.) ‘The Gelling pricéjof the VTS will be BUT 10,000}per unit and sales in the first year to G1) December 2016)are expected to be(5,000) units per aan i feasing by(4%} pa thereafter. Relevant direct labour and material costs are expected to be BD! 17,600 per unit} er unit pnd incremental fixed production costs are 5 are expected to be BDT(35) ‘million pa.)The Selling price) od ‘cosls)are stated in 3) Deceniber 2015 prices and are expected to incrense at the rite of — 2% &(7% per aniiune respectcely. Seesearch and development costs to 31 December 2015 (ll hmount to BDT 10 ; : om Preparec by: Pankaj Chandra Bhowmick prahitrhiv calelatirn fhe 9. eam phowmihlsbgmalon Nob OT7S7 Warlavg) eopihal ontevto hy vasested. Gotorea. bo leolabien Cer fortionInvestment in{working capital will be BDT/Symillion on 31) Deseret 2015 ee hs twill increase in line with ste, zolnimes and inflation. Working capital will be fully recoverable on @VDecember 2019. Tracking fae torenta as for the life of the project. cal sett sorgmitien will be payable in advance oi 31 December each year and will ot increase over the life of . Gane machinery will cost BT 250 million on@1)December 2015. The plant and machinery is expected e have a resale value of BDT(60 million (in 31 December 2019 prices) at the end of the project. The plant an machinery will attract0% (reducing c) capital allowances in the year of expenditure — z na) subsequent year of ownership by the company, except the final year. In the final year, the difference between the plant and machinery’s written down value for tax purposes and its disposal proceeds will be treated by the company either: (i) as an additional tax relief, if the disposal proceeds are less than the tax written down value, or (ii) as a balancing charge, ifthe disposal proceeds are more than the tax written down value, Corporation tax will be’35% pa for the foreseeable future and that (ax\flows arise in the same yearlas the cash flows whicl a ‘The project will be financed from the company’s pool of funds and there will be no change in current gearing levels. An appropriate weighted average cost of capital for the project is 14% pa TL’s directors are concerned that there are rumors in the industry of reséarch by a rival company into a much cheaper alternative to the GPS devices currently available. However, the rumors that the directors have heard suggest that this research will take another year to complete and, if it is successful, it will be a further year before any new devices are operational, ~ Requirements: i. Calculate, using money cash flows, the net present value of the VIS project onl) December 2015 and advise ‘TL's board as to whether it should proceed, <— u alculate and comment upon the sensitivity of the project to a change in the annual rent of the factory and the [weighted average cost of enpital. 4 iii, Assume now that the project had been financed entirely by debt and that this had caused the gearing of TL to,change materially. Describe how you would have appraised the project in such circumstancey~ 3 If the board of TL decided to set up the manufacturing facility overseas, advise the board on how it might limit its effects of political risk that could change the value ofthe project,— 3 ®) Nov Dee 2015 3. Grand Palace Ltd (GPL) is a mainstream package holiday provider. The holidays that the company provicles are principally by air to popular Bangladesh Tourist destinations in(hotel]and (self-catering accommodation. ‘The company also has a small division (Camping) that provides holiday: in three locations in Bangladesh, Here the clients travel to their chosen site in their own cars, using Train or Air arranged by Camping. Once on the site the clients look after themselves, GPL's directors have been skeptical about the Camping operation. It has not been very profitable. Itis believed by the directors that it would need to be expanded substantially to make it viable, but they are reluctant to do 80, preferring lo expand their core air/hotel activities. Seeing a business opportunity and a probable means of safeguarding an otherwise uncertain future, a group of senior Camping managers has approached the board with a managemént buy-out proposal. Since the buy-out team has yet to look for financing and it will take time to set up a deal, the team suggested that the buy-out, should it occur, would take place on 31 December 2015. The board sees the buy-out proposal as an opportunity to deal definitively with Camping, GPL has agreed to the buy-out provided that it receives, from the buy-out team, (L5)times of the present value, at 31 December Q015, of the projected incremental cash flows of Camping over the (three) starting the following day and discounted at GPL’s WACC. You have been asked to calculate the buy-out price and you have found the following information, (1) The investment in new tents and related equipment etc on(fanuary 201)would total BDT(125) the lion. At end of 2018 these will be disposed of for a negligible sum, These assets will attract tax depreciation, but Prepared by: Pankaj Chana Bhov ick E-mail: bhowmick014@gmail.com, Mob:0167769373 tent accommodation on campsites ~‘excluded from the general pool. This means that they attract 20% (reducing balance) tax depreciation in ‘car of acquisition and in every subsequent year of being owned ‘by the company, exept the last year. In last year, the difference between the assets' written down value for tax purposes and their disposal roceeds will either be allowed to the company as an additional tax relief, ifthe disposal proceeds are less than the written down value, or be charged to the company, if the disposal proceeds are more than the written down value. “ | The existing tents and related equipment would be discarded buy-out proposal. / (2) Annual revenues from Camping operations are hard to predict. In the [past ten years they have four times been about BT 120 million, five times about BDT’150) million and one time about BDT'180 million. GPL's directors and thé buy-out team agree that the past s are as good a guide to the next three years as is likely to be found. Ail of these revenues are expressed in 1 January 2016 prices. \\ (3) Variable costs tend to average about 82% of revenues, (4) Fixed costs, including a share of C GPL's(head million. o-3=6 (6) Operating cash flows should be assumed to occur at the end of the relevant year, (6) The working capital tied up in Camping operations is about0% of the sales revenue. This must be in place by the tartpf the y ir concerned. It will be released at the endjof operations. _ ~ (7) GPL pays tax at the rate of 35% and it has an accounting year end 0 31)December. Assume that tax is payable at the end of the year concmed. ~ (8) Inflation’is expected to average 7%)per annum for the foreseeable future. All financial amounts mentioned above are expressed al January 2016 prices. 7 fi (9) GPL’s weighted average cost of capital (WACC) Byrne Gar) t98) #(1) Requirements Calculate, using 'money! (or 'nominal’) cash flows, the price at which GPL will offer Camping to the buy-out team, at the end of the 2015 season, irrespective of the ‘costs equal to BOT 3 million) average about BDT(9) May June 2016 2. (a) Differentiate between sensitivity and scénatio analyses. What advantage does scenario analysis has over sensitivity analysis? lov Dee 2016 — wary in angwenssnee{— § Qa. Tripti Private Ltd has six project investment opportunities in the pipeline. The estimated eash flows (BOT Million) of the identified projects are as follows. Assume all projects will cease in 2019. Projects 2016 2017 2018, 2019 A (70) (20) 60 70 B (60) 40 45 50 c (0) 35 40 45 D (70) 40 50 60 E (60) (60) B 50 FB (75) (40) 100 7 Notes: . (1) Cost of capital of the firm is 12% a (2) Size of any project could be adjusted to the availability of funds (3) Capital available for the investment in 2016 is BDT 300 million only (4) No residual value (6) Ignore income tax Prepared by: ‘Email bhowwckO140gy Pankaj Chandra Bhowinick com, Mob 01677693737*) cS tO Jigh electricity costs have mace Requirements: i (@ Determine the projects that should be undertaken by the company if the capital available for investment in 206 ks liited to BOTA million, and stich fimilation in Subsequent years. 3 (ii) Ifthe projects are indivisible instead of adjusting the available funds given in Note 2 i.e. projects have to be accepted in their entirety oF not at al, explain strategies available to improve the outcome of the fund availability, 3 ta ©) 7 University of Economics ha: 4 Somi@ legal and academic research at a cost of BDT’ 10,000 into the possibilities of selling a Course on Econometrics. The University is unsure of the oittcome of such a course, but feels that there is a. 70% chance of annual income of BDT 7,000,000 and a 30% chance of annual income of BDT 300,000. | a - Printing machinery would need to be bought at a cost of BDT{%4000,000 payable in (two) equal_ anal instalments one immediately and one,in one year's time i the equipment had been operating correctly for a year. The equipment would be depréciated ona straight line basis by BDT'399,000 per annum for ten years and then sold. Use would also be made of some existing equipment which originally cost BDT 500,000, has a ‘book value of BDT 20,000, and would cost BDT 600,000 to replace, though the firm is considering selling it for BDT 100,000. ; Productioit and labour costs in the first'year would amount to BDT/90,000 payable in on’ year's time, though the next nine years' costs would fall to BDT\’ demand were low in the first yeau Revenue would first be receivable in Gud. fears’ time and for the following (fine years. Fixed costs of BDT 150,000 per annum would be reallocated to this Course, _ TK pire semren@_aeRay MD chepien.§ Or Requirements: Calculate the following. - - (i) Accounting rate of return by expressing Average annual pre-tax accounting profit on the project as a percentage of the(book value of the initial investment) 2 (ii) Payback period. 3 (iii) Net present value of the project at the company's required rate of return of 10%.3 (jv) Internal rate of return of the project. 3 (v) The sensitivity of your result in (ii) to the estimates of 6 ~ The required rate of return Sales revenue - Life of the project , repeal Vt Shor On Ve yen en. May June 2017 why Brgithoah. owenren. Linen Neace [e7mrey @ Cmca 1. (a) What are the three types of project risk? Which type of project risk is theoretically the most relevant? why? : 4 ‘mer Corporation’ chicken plucking machine economically worthless. ‘Only two machines are available to feplace it. The international Plucking Machine (IPM) model is available only ona Jease basis. The lease payment will be Tk 65,000 per Yearfor wd years, due at the(beginning of each year. This machine will save Farmer ‘Tk (5,000 per year) through reductions in electricity costs. AS an alternative, Farmer can purchase a more eneigy efficient machine from Basic Machine Corporation (BMC) for [Tk 330,000] This machine will save {Ik 25,00 per yeas in electricity costs. A local bank has offered to finance the machine with Tk 330,000 loan, The interest rate on the loan will be 10% on the remaining balance and will require five annual principal payments of/Tk 66,000) Farmer has a target debt-to-asset ratio QL 67%) Farmer is in the(34%)tax bracket. After’5)years, both machines will be worthless. The machine will be depreciated on a (Giraightline basis) ca pio Ovok yinkeuad Anarcen ere Inneleyonl— Prepared by: Pankaj Chandea Bhowrick 1 Baile fayrment fomawees”s, aloo jnnlevard— Email: bhowmickOt4@pmail.com, Mob01677693737_/Svould Farner lease the IPM machine or purchase the more efficient BMC machine? J 6 Hii) Does your answer depend on the form of financing for direct purchase? Pj ye v2 2 (ii) How much debt is displaced by this lease? [yw easel vedic “8 3 (2)May June 2017 ' 4. (a) What is the primary difference between the MIRR and the regular IRR? What is the “multiple IRR problem” and what condition is necessary for that to occur? 5 sva(b) Shatil Corporation manufactures fine furniture. The company is deciding whether to introduce a new ~~ mahogany dining room table set. The set will Sell for Tk 6 10U}including a set of eight chairs. The company feels that sales will be 1800, 1950, 2500, 2350 and 2100 sats per year for the next five years respectively. Variable costs will amount to 45% of sales, and fixed cost8 are Tk 1.9:nn per year. The new tables will require inventory amounting to 10% of sales, produced and stockpiled in the year prior to sales, It is believed that the addition of the new table will cause loss of 250 tables per year of the oak tables the company produces. These tables sell for (Tk 4,500 and have variable costs of 40% of sales. The inventory for this oak table is also{1035_of sales. Shatil currently has @xcess production capacity. If the company buys the necessary equipment today, it will cost Tk (i8mn! However, the excess production capacity means the company can produce the(new table! withou ‘buying new equipment. The company controller has said that the current excess capacity will end in W6 ye with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the Tk 182hn in two years to accommodate the increased sales ofits current products. In five years, the new equipment will have a market value of TK@.Dn if purchased today and Tk(7.un if purchased in tw years, The equipment is depreciated on a Seven yea MACRS schedule. The company has a {ax rate of 40% and the required return for the project is 1%. yn. pupweiahia— M4297 Requirements: t/a) rape ese ms, Wap = 20-56% (i) Should Shatil undertake the new project? 8 AN 6f 7 in Meng Baler ARO i) Can you perform an IRR analysis on this project? How many IRRs would you expect to find? 2 (iii) How would you interpret the profitability index? 2 . ars] (©) Deshi Pictures Limited (DPL) is planning, to produce a big budget film based on Liberation War 1971. The company’s Planning team has to date spent BDT(@)Million researching the commercial elements and costs associated with producing and marketing the proposed film. The findings of the research are given below: BOX Office Projections Year? Year3 Yeard Movie Viewers 200,000 120,000 60,000 ‘The company will receive BDT 300 per cinema viewer throughout the three years. This will reduce to BDT 250 in any year that the movie is viewed by in excess of 100,000 viewers. The movie will be made in year 1 of the proposal and released for viewing/sale/download for a three year period commencing in year 2 ; "The company also forecasts that 15,000 DVDs of the movie will be sold in year 2 and will be reduced by 20% in cach of subsequent two years at an initial price of BDT 250 in year 2, reducing by BDT 50 per year thereafter in order to prolong sales. . Tn addition, it is anticipated that the movie may be downloaded! at a cost to the purchaser of BDT 500 per download, The hosting website E-B-Movie's commission scheditle is as follows: ‘Commission T= 25,000 5,01-100,000 100,001 | Schedule i | ‘Commission % 15% 20% [25% | DPL expects that the following number of downloads will be sold in each year. Prepared by: Pankaj Chanulra Bhowaiek Emil: bhovsmichO14@ gmail.com, Mob 01677693797Projected Downloads | Year2 Year3 Year 4 Number of Downloads _| 50,000 150,000 20,000 ‘The movie will incur the following promotional costs: Projected Promotional Costs | Year 2 Year3 Year 4 Print Media 5,000,000 3,000,000 2,000,000 Premier Event 2,000,000 - a DVD Posters 500,000 500,000 = Internet Adverts 730,000 500,000 500,000 ‘The cost of producing this movie will be as follows: of 2.5% of all gross revenues accruing to DPL. This commission is to belpaid one year after to DPL i v The cost of the movie cast will be: \e revenues accrue A famous director has been selected. This director will be paid BDT(5 Million. rate acommission tert Forecast Acting Costs Number Gost per Actor/Actress (BD) Lead 3 7,500,000 Support 20 200,000 Extras 250) 25,000, | Equipment costing BDT(15 Million will be purchased at the outset of the production. It will be resold when the movie is completed at the end of yea for estimated sales proceeds of BDT{8)Million. DPL’s Finance Director has asked you to use the company’s Weighted Average Cost of Capital (WACC) for the purpose of determining the project's Net Present Value. You have discerned the following information in relation to the company’s various sources of finance: [DPL’s Fi nance Structure Face Value (BDT Million) Ordinary Shares (BDT 2 per Share) 15 20% Preference Shares (BDT 1 per Share) 5 {8% Irredeemable Loan Stock 4 ‘The ordinary shares are trading at BDTA.S50iex di ‘The recently confirmed preference dividend of BD: trading at parex int The most recent dividend paid on DPL's ordinary shares was a per share, The average annual rate of growth of dividend in ordinary shares is(8%, which is likely to contfaue for some years to come. DPL pays Income Tax atan effective rate of 19%,- iden, whilst the preference shares are trading at BDT 2.40. 0.20)per share has not been paid as yet. The loan stock. Requirement: Advise Deshi Pictures Limited, based on strictly net present value ctiteria, whether or not the production of the proposed movie, 18 should embark on Nov Dec 2017 #h=rken~ 1. (a) Strategic planning is concerned with the fong-term|direction of the business and how the business will achieve its, objectives. Financial strategy] is concerned with the financial aspects of the strategic planning process, so in reality they are part and parcel of the same overall picture. Having decided on its overall direction and objectives a firm must then make more detailed supporting financial decisions over the medium to short term. There are three broad categories of financial decisions which are interlinked. Explain about these (ifee categories of financial decision)and illustrate with fn exaumplein each category to demonstrate theinfnterrelationship) 7 Prepared by: Pankaj Chanclea Bhow ick Femail: howmickO14%ipmailcom, Mote 01677098717in-agency relationship occurs when a principal (shareholders) hires an agent (management) to perform five uy. A conllict, known as an "agency problem, arises when there is a conflict of interest between the needs of the principal and the needs of the agent. Explain why the Management might pursue an agenda in following situations which are(at odds With the maximisation of shareholder wealth:| —— i. Takeovers a : : ii, Time horizon iii, Risks, and iv. Debt COMER EES Nice Shoe Ltd) a footwear manufacturer, has a factory in Chittagong that it rents on a lease due to expire at the end of Decémber 2017, The factory is entirely devoted to making shoes for(Gabies and Td persons. The market for these products(fas been declining and a decision had been taken {0 years ago not to seek to fenew the lease in 2020,'but to Close down)Chittagong factory when the lease expires.| At a recent meeting of the company's board of directors the question was raised as to whether it might be more beneficial to close at the end of December 2017; three years earlier than had originally been decided. As a member of the company's finance staff, you have been asked to look into this question, —s { Sales of Chittagong Factory are projected to be as follows for the next three years. i Year Taka'000 : 2018 12,0000 By 2019 8,000 7 Sire 2020 6,000 « ‘The marketing director believes that these figures could be increased if an advertising campaign were to be underiaken. Such a campaign would involve cash outlays of Taka(Lmillion on (31) December in each of 2017, 2018 and 2019. The marketing director acknowledges that the results of the advertising campaign aré uncertain, but she believes that there would be at least {15% increase in sales on the projected figures and the increase could be as high as 25%. To ease assessment, it has been agreed that it is reasonable to assume that the increase will be either 15% with a probability of 30%, or 25% with a probability of 70%) If the advertising were to be undertaken, the expenditure would be available forjfax relief in the accounting year in which it would be incurred,” ‘The variable costs of manufacture of Chittagong Factory are estimated at(853 of the selling price. The rent of the factory is Taka(S)million a year, payable on DJanuary, The owner of thé factory will not agree to an early termination of the lease, but the company has the right tosublet the factory. The directors are confident of finding a subtenant who would pay Taka‘4 million on 1 January in each of the three relevant years. ‘The plant used in the factory was all bought in{January 2014)for ‘Takal2,000,000) Were the factory to close in 2017 it would be sold in December for Taka 1,000,000, but iit were retained itil 2020 it would be sold in December of that year for an estimated Taka 200,000, For the purposes of the present analysis, treat the plant as if it had been excluded from the general pool. This means tat it attracts 25% (reducing balance) tx depreciation in the yer ofits acquisition and in every subsequent yen ofits being owned by the company excep the lst yar. In the last. year, the difference between the plant's written down value for tax purposes and its disposal proceeds will xither be allowed to the company as an additional tax relic if tne disposal proceeds are less than the written own value, or be charged to the company if the disposal proceeds are more than the tax written down value 71,000,000!each year, inclucling a Taka _ Rpart|feom (rent pr ne epreiation ViEeT wre estim 300,000 allocation oF head office cdsts. When the factory closes, certain staff would be entitled to redundancy payments. These would total Taka 400,000 closure were to take place in, ‘2017, but rise to Taka 450,000 if, Uosure were in 2020/In either case the payment would be made on the day of closure and be fully allowable for income tax for the year concerned, Prepared by: Pankaj Chandra Bhowensick. -maik bhowmickO14@email.com, Mob01677685737©) Production of Chittagong Factory gives rise to a ‘working capital) t of an amount equal to C factory gives rise to a‘working capitallrequirement of an ar equal to(5% of the sales value. This needs to be in place by the beginning of each. year.toncerned. By the end of the production period all of the working capital will have been released. Closure on either date is not expected to haye any effect on any of the company's other activities. It is estimated that the appropriate cost of capital is(6%)per annum, The company's accounting year is to 31 December and the income tax rate of 25% is payable atthe end of the yer to whic it relates. ae Requirements: {i) Determine, on the basis of net present value (NPV), whether the advertising should be undertaken, assuming that closure is delayed until 2020.) - : 10 (ii) Taking account of your conclusion from (i) determine, on the basis of NPV, whether the company should close the factory in 2017 or in 2020, (i Reavinone “Bs ndyuisemr) ets ercme] omeluded bere) 15 Nov Dec 2018 __ 6 (a) When is EAC (Equivalent Annual Cost) analysis appropriate for comparing two or more projects? Why is, ~ "For simplici ths mtd usc? Are thre any tmpleltestumplonsrequbed Wy(hs Sefiod that you find troubling? Explain. 4 (b) Benson Enterprises is evaluating alternative uses for a three-story(Mmanufacturing and {warehousing building that it has. purchased for Tk_1,450,000, The company can continue fo rent the building to the present ‘decupants for TK(61,000 per year. The present occupants have indicated an interest in staying in the building for at least another/15 years. Alternatively, the company could modify the existing structure to use for its own ‘manufacturing and warehousing needs. Benson's production engineer feels the building could be adapted to handle one of two new product lines. The cost and revenue data for the two product altematives are as follows: 7 Product A ProductB, Initial cash outlay for building modifications 95,000 125,000 Initial cash outlay for equipment 195,000 230,000 Annual pretax cash revenues (generated for 15 years) 180,000 215,000 ‘Annual pretax cash expenditures (generated for 15 years) 70,000 99,000 “The building will be used for only(S)years for either Product A or Product B. After 15 years the building will be too small for efficient procluction of either product line. At that time, Benson plans to rent the building to firms similar to the current occupants. To rent the building again, Benson will need to restore the building to ash cost of restoring the building if Product A has been undertaken is Tk its present layout. The estimated c factured, the cash cost will be Tk 60,000. These cash costs can be deducted 155,000. If Product B has been manu for(ax purposes in the year the expenditures occur, / Benson will depreciate the original building shell (purchased for Tk 1,450,000) over a 80 Year life to zero, regardless of which alternative it chooses. The building modifications and equipment purchases for either product are estimated to have a 15 year life. They will be depreciated by the straight line method. The firm's (lax rate is 34%, and its required gate of return on such investments is 12% 1, assume all cash flow occur at the end of the year. The initial outlays for modifications and ‘equipment will occur today (Year 0), and the restoration outlays will occur at the end of Year (15) Benson has other profitable ongoing operations that are sufficient to cover any losse: Which use of the building would you recommend to management? 2 7. SJL is a transport operator. It has a financial year end oft) December. SJL's board is investigating capital investment proposals for each of its Bus Division. The bus division is bidding for a {hree-yeasicontract to opera in the north east of Bangladesh. This contract covers the perio te a number of bus routes in a large tourist resort 1d from DJanuary 2019 to 31 December.2021, Your Prepared by: Pankaj Chandra Bhow mick E-mail bhowmihO1i@emaileom, Mob:01677693797/ ,gues in SJL's finance team have produced estimates of the incremental income and expenses (ini _»ember 2018 prices) for the period of the contract as shown below: ‘Years to 31 December 2019 2020 2021 y BDT BDT BDT care 16,531,200 40,500,000 62,100,000 Fuel costs (7,776,000) (8,035,200) (8,812,800) Other costs (see note) (13,590,000) (15,120,000) (16,290,000) - Profit/ (Loss before taxation (4,834,800) 17,344,800 36,997,200 Note Fy at A_Soane a re cost per bus is BDT SIL is considering hiring iy operate on this new contract. Théannti 5 (810,000 \(which is allowable for tax) and this has been included in the ‘other costs’ figure above. Bus purchase 0 As an alternative to the plan to hire the eight new buses, SJL’s directors are considering whether it would be preferable to purchase them instead. These would cost BDT,S;600,000 €ach on 31December 2018 and would have a market value of BDT 900,000 each (in 31 December 2021 prices) at the end of the contract. It is company policy to write off buses using the straight-line depreciation method. ‘The buses will attract (20% (reducing balance) capital allowances in the year of expenditure and in every subsequent year of ownership by the company, except the final year. In the final year, the difference between the buses’ written down value for tax purposes and their disposal proceeds will be treated by the company either: = as a balancing allowance, if the disposal proceeds arc less than the tax written down value, or - as a balancing charge, if the disposal proceeds are more than the tax writlen down value. Inflation = SJL’s directors estimate that all costs except for cap fare increases at 3% pa, oe Corporation tax Assume that the rate of corporation tax will bé 30}, pa for the foreseeable future and that tax flows arise in the same year as the cash flows which gave rise to them. Cost of eapital_ = SJL uses a{mone})cost of capital of 12% pa for investment appraisal purposes, Cash flows ‘Assume that, unless otherwise instructed, all cash flows occur at the end of a financial year. ring and (preciation) will increase by 4} pa, but they will ~ Requirements: 8 of the two proposals ~ bus {a) Using money cash flows, calculate the net present values on(31)December 2018 0 hiring or Bus purchase - and advise SJL’s board which of the two proposals wuld accept. Calculate how sensitive your decision in (a) above is(to)the market value of the buses oni: December 2021 (© Estimate the internal rate of return of the bus purchase proposal and explain the advantages and disadvantages of this method of investment appraisal. GB) May June 2019 6, Sun Light Ltd, (SLL) manufacties domestic solar panels and has a financial year end of 31)December. Its directors are now considering expanding SLL’s scale of operations via an initiative called "Project North”. If “Project North” is proceed, then SLL would have votive t in new Capital equipment which would cost Tk:3) million and be purchased on (31 December. shnological change in the solar of the fast rate of panel industry, SLL’s directors estimate the “Project North” would enjoy a ffhree-yeat period of competitive advantage (2019-2021). Prepared by: Pankaj Chanidra Bhowmick Exmail bhowmickO1s@gmailcom, Mob01677695737SLL has paid for market research which produced the following estimates for “Project North”. Year to 31 December 2019 (all figures expressed in December 2018 prices) Total sales ‘Tk.2,200,0007 Total variable costs ‘Tk.1,200,000~ _____ Total fixed costs (including interest paid of Tk.17,000) Tk.427,000 Increasing sales volume in 2020 and 2021 10% pa Inflation rates: Sales prices pa (Allcosts (8Xpa “1 Working capital (to be in place at the start of each trading year) {0% of total annual sales 1 Trade-in value of capital equipment (in December 2021 prices) 600,000 Capital allowances SLL’s machinery and equipment attracts capital allowances, but is and will be excluded front the general pool. ‘The equipment attracts(20% (reducing balance) capital allowances in the year of expenditure and in every subsequent year of ownership by the company, except the final year. In the final year, the difference between the machinery’s written down value for tax purposes and its disposal proceeds will be either: (i) treated by the company as an additional tax relief ifthe disposal proceeds are less than the tax written down value, or (i) be treated as a balancing charge to the company, if the disposal proceeds are more than the tax written down value. Other information _ ee U SLL uses a post-tax{noney| weighted average cost of capital of. ©) SLL’s directors would like to assume that the corporation tax rate will tax will be payable in the same year as the cash flows to which it relates ~ 1 Unless otherwise stated all cash flows occur atthe end the relevant trang year. Requirements: (@) Calculate the net present value of the “Project North” initiative at 31 December 2018 and advise SLL’s directors whether they should proceed with it 2 ' e-Ab) Calculate the sensitivity ofthe decision in part (a) to changes in the estimated{olume of sales. Ignore the NS" impact of working capital in this caleulation. 3 (© Advise SLL’s directors whether “Project North” initiative should proceed ifthe trade-in value ofthe capital equipment at 31 December 2018 were to be Tk.100,000 (in December 2021 prices). 3 terest payment of Tk.17,000 in part (a) 2 (q) Explain briefly your treatment of SLL's (€) Explain Sharcholder Value Analysis and identify the extent to which its principles are employed in making the decision in part (a). ® Now Dec 2019 5, Best Hotels Limited is a listed company which owns a chain of hotels around the country. The managemony of Best Hotels are investigating a BDT(199) million potential investment in the real estate business which would css. The investment would involve the Construction ancl be a diversification from its mainstream bu: is Hanagement of a Shopping Mal} AnGuital investment payment of BDT(120\nillion (payable es] and the reminder upon completion OF the Shopping Mall at the end of fyear_ong} The operation’ would vrumence immediately after completion of the Mall. The Shopping Mall is expected to operate for 3 putiow! of _Gyears after which a major investment would be required. The rescual value a the ‘end of its life cycle (after epared by: Pankaj Chaneta Bhowmick smal BhownvickOH4@gmailcom, Nob 016776957371 after tax. The rental charges would be based on the floor from now) is projected to be BDT 45 mi oa of floor area Number of shops Monthly rent per shop Medium 40 'BDT 65,000 arge 30 BDT 180,000 It’s expected that during the first year of operation the shop occupancy will be 60% for Medtium and 40% for Large. During the subsequent years, the shop occupancy would be at full capacity. /Snnual operating costs are expected to be of the annual revenue. ]- ‘The corporate tax rate is 97.59 per year. Requirements: (a) Evaluate the proposed investment in the Real Estate Business using the Net Present Value method. Assume the cost of capital is 13% per year, 10 (b) Assuming the role of a Financial Consultant, write a brief report to the management of Best Hotels Ltd, discussing the non-financial factors that should be considered before the decision to diversify into the real 5 estate business is made. Pankay Chan con, Mob:Gt677698 B-matlChapter: 4 Source of Finance Nov- Dec 2012 3 The following financial po company, which wishes to rai tion statement as at 30 June 2012 refers to NFS Ltd. a stock exchange-listed Tk. 200m in cash in order to acquire a competitor. Acwets Tk.m Tk.m Tk. Non-current assets Carrentassas mm Total assets 511 Equity and liabilities Share capital 100 Retained earnings 121 Total equity 221 Non-current liabilities Long-term borrowings 100 Current liabilities Trade payables 30 Short-term borrowings 160 Total current liabilities 190 Total liabilities 290 Total equity and liabilities Sit The recent performance of NFS Ltd. in profitability terms is as follows: Year ending 30 June 2009 2010 2011 2012 Tkm Tk.m Tk m Revenue 126 273 1566 1893 Operating profit 417 433 504 567 ( Finance charges (interest) 60 62 Rs 188 Profit before tax 35 374 376 379 Profit after tax 250 260 263 265 Notes: 1. The long-term borrowings are 6% bonds that are repayable in 2014 2. The short-term borrowings consist of an overdraft at an annual interest rate of 8% 3. The current assets do not inclucle any cash deposits - NFS Ltd. has not paid any dividend in the last four years . The number of ordinary shares issued by the company has not changed in recent years . The target company has no debt finance and its forecast profit before interest and tax for 2013 is Tk. 28 million Required: (a) Evaluate suitable methods of raising Tk.200 million required by NFS Ltd. supporting your evaluation with both analysis and critical discussion (b) Briefly explain the factors that will influence the rate of interest charged on a new issue of bons (6) Hdentify and describe the three forms of efficiency that may be found in a capital market, eee May June 2013, (@) “Businesses have an ongoing capital requirement if they are to continue to meet the sharcholders expectation.” Explain how capital market helps the business in this regard? 4 (b) What is meant by “going public”? Discuss its advantages and disadvantages. 4 Prepared by: Pankaj Chandra Bhowmick E-mail: bhowntick0l4@gmail com, Mob: 01677-683737Nov-dee 2013, 2(d) Kohinoor Ltd. has issued 100,000 Tk. 1 equity shares which are at present selling for Tk3 pet share. The company has plans to issue tights to purchase one new equity share at a price of Tk. 2 per share for every four shares. < (i) Calculate the theoretical ex-rights price of equity shares. 3 (i) Calculate the theoretical value of a right before the shares sell ex-rights. 3 May June 2014 ava: a ola Ws extshin. 2 (5) inebde. seme afarmebiin feprng He's aveshin’ Qe The CEO of Zheelmill Paints has sold the company's controlling stake (51%) to a high net worth Co Dusinessman at Tk. 75 per share, He continues to hold 15% of the equity and enters into a contract to be its 7 CEO for the next3 years. - In an attempt to improve financial performance, recently the company made a successful rights issue of 4 : 5 at ‘Tk. 50 per share to infuse funds, and the entire proceeds had been used to retire the debt. The company offered a redundancy package to some of its workforce and 1,000 workers accepted the compensation package of 6 months’ salary (average worker salary is Tk, 35,000 per month). The company reduces its working capital by going for a subcontractor model; thereby the company would increase its operating profit to Tk. 1.5 billion (before the compensation costs). Post rights shares are trading at Tk. 65 per share and Zheelmill Paints declares 4 60% dividend. . Required: < {i) Determine the new capital structure of Zheelmill Paints immediately after the rights issue, 4 ‘What would be the dividend yield of the high net worth investor? 4 ‘Assuming the dividend growth is 5% and the cost of equity is 20%, calculate the share price of Zheelmill Paints using Gordon's dividend growth model. 5 May June 2016 “The Shabib Company plans to raise a net amount of Tk 270m to finance new equipment and working capital nearly 2016, Two alternatives are being considered: Common stock may be sold to net Tu(6yper share or bonds yielding 12% may be issued. The balance sheet and income statement for the Shabib Company prior to financing are as follows: W/o aesril : ‘The Shabib Company: ni Balance Sheet as of December 31, 2015 Mn Taka Mn Taka Current asset 900.00 Accounts payable 17250 Net Fixed Asset | 450.00 Notes payable to bank 255,00 Other Current liabilities 225.00 652.506 Long term debt (10%) 300.000 Common Stock Tk3 per.share 60.00. Retained Earning 397.50 Total assets: 1,350.00 ‘Total Equity é Liabilities 1,350.00 ‘The Shabib Company: Income statement for the year ended Decembex$1,2015 « Sales 2475.00 s 2227.50 Operating cost 27750 Srr(t0%) 247.50 EBIT(10%) Prepared by: Pankaj Chandra Bhownich ‘E-mu: now nsickO14Samailcom, Mob: 01677-099797 ye. fer Shona OTK sin gugmeak Arse I CGZn)e 2075)ston short form lebtt fom Untorest on long, term debt wow Faring before taves 202.50 Taves( 10°) 1.00 Net income 121,50 bution for annual sales is as follows: The probability dist : Probability Annual § sles MnTaka 3 250,00 4 27000 3 ssi0 Requirement: ning that EBID is equal to 10% of sales, calculate earnings por shane unuler both the debt fi the stock financing alternatives at each possible level of hen calculate expected earnings per share anal Cociticient of variation of EPS under Bath debt and slock fin nicing alternatives, Also, calculate the debt ratio and the times-interest -Carned (TIE) ratio at the expected sales lovel under each alte old debt will remain outstandin, Which financing method do you recomme ul? ¢ BP (2) Youare presented with the following different views of stock market behaviown” © *() Ia company publishes an earnings figure higher than the market expects the shares of that company to experience an abnormally high return both on the day of the earnings announcement and over the two or thece days following. (2) The return on professionally managed portfotios of equities is likely to be no betler than that which oul beachieved by a naive investor who holds the market portfolio, ) Share prices isually seem to rise sharply in the first few days of al year. However, this can be explained by the fact that many investors sll losing stocks immediately prior lo the fiscal year enul in onler to establish a tax loss for capital gains tax purposes. This causes abnormal downward pressure which is released when the new fiscal year begins. Requirement (i) Briefly describe the three forms of the efficient markets hy pothesis. 1 H(ti) Consider what each of the above three statements tells you about the efficiency of the stock market. Where appropriate, relate your comments to one or more forms of the efficient markets hypothesis, 6 4 (b) Padma Limited, a quoted company on The Dhaka Stock Exchange (DS), kas 50,000,000 shares in issue Their current market price is BOIS per share, Meghna Limited, another DSE quoted company las 0,000,000 ‘e currently trading at BDT 20 each, This may be taken as the siltation or day 0. i 3.the Board of Meghna Limited (avides @ sprivate mecting to make a takeover bid for Pacdina Limited. AT the Board meeting, Meghna Limited's Chairman informs his fellow board members that a detailed assessment of the synergistic benefits of the takeover is estimated at having, a Net Present Value of BDI 200,000,000. The Board! agrees to propose a eash offer to shareholel nit Limited of BOT (O)per shave There will be no Share consideration, ’ On day(6}he Board of Meghna Limited publich announces the lerms of their offer. They de uot n {o the potential synergistic benefits, 2 On day 10 Meghna Limited's Boar yOM shares in, details publicly details of the potential synergistic bonelits Requiremer jenoring tax and the time value of money between day 0 and 10, and assuming that no other factors have influenced the share price of both Meghna Limited andl Padma Limited, determine thes Day 0 Prepared by: Pankaj Claes own MrowinickOldrymaiteow, Mole O72) 4747Day3 "6 10 Shate price of both cony i is consi I ‘ompanies if the Dhaka Stock Excha {@) Semi-strong Form Efficiency 8 ieee a i) Strong Form Efficieney Nov Dec 2016 4. CNC has an il ged ence 41 sano age capital structure. It has 200,000 shares of Tk 2 par value common stock i “ eu ae * founder, ‘who Was also its research director and most successful inventor, retired Sate eee 4, CNC we ly with materially lower growth expectations ana Bltvly few - Unfortunately, there was no way to replace the CNC found it necessary to plough back most ofits earnings to anges owt shih 125 Future growth rate at 5% rate is considered realistic, but the Payout, Further, it now appears that new investment projects’ Jai rate of return required by CNC's stockholders would are, THeBOD| for 20 Cc ‘ould amount to only Tk, 800,000 for 2015 in incomelIf the existing 20% dividend payout were continued, 7 but, as noted, investments that yield the 14% cost of capital ied earnings would be Tk L6mn in 2015, would amount to only Tk 800,009) ~ Bo one encouraging point is that the high eamings from exiting assels are expected to continue, and net e ec ie, Stil expected for 2015. Given the dramatically changed circumstances, CNCe management is reviewing the firm's dividend policy, Requirements: “ i, Assuming that the acceptable 2015 investment projects would be financed entirel during the year and that CNC uses the residual dividend model, calculate 4. What payout ratio does your answer to part () imply for 2015? iii, If a 60% payout ratio is maintained for the foreseeable future, price of the common stock? How does this compare with the mau the assumptions exiting just before the news about the founder's Felirement? If the two values of PO are different, comment on why. / “ 3 (@, What would happen to the price of the stock if the old 20% payout were continued? Assume that if this SE payout is maintained, the average rate of return on the retained earnings will fall to 7.5% and the new. growth rate will be 6%. i ly by earnings retained DPS in 2015, 1 2 what is your estimate of the present market ket price that should have prevailed under Nov Dec 2019 3. SW is a well established retailer of gymnasium equipment. The company's key market is in Dhaka, Extracts from the company's most recently published annual report (as at 31 December 2019) are shown below: BDT'000 = BDT'000 = BDT‘000 Non-current assets 3518 Current assets . 3,780 Inventories ' Trade receivables 3,668 7a Total assets oss Ordinary shares (50p) on Retained earnings ys Total equity Non-current liabilities: asso 8% Debentures (redeemable in 2024) Current liabilities: re by: Pankaj Chandra Bhowntick Prepare by: Pena} E-mail: bhowick04G@ganailcom, Mob: 01677-695757nade payables am Sater payables 2s een tobi borrowings 2240 5,482 Total liabilities som 10,966 g's finance director has calculated that the company needs to raise BDT 1,827,777 of oat jonal long-term funds to provide finance for the following three matters: : Oe Over the past three years, SVs anual revenue has changed very Fite an so its senior managemen fe Zonsidesing extending operations into Chatlogram and Sylhet, This would necessitate expenditure of BOT 950,000 on new buildings and vehicles at the company's existing distribution centre > Siv's short-term borrowings comprise only a bank overdraft and the company is under pressure Hors Xe Tak to anluce tet overdeatt (oie: has stayet clase tits current level forthe past eighteen months) to BOT 2 million > Its trade suppliers are unhappy that they have to wait, like this figure reduced by ten days. ‘on average, 45 days to receive payment and would You are a member of SW's finance team and have been asked to prepare workings that would aid management in their decision. Other information relevant to the situation W's total revenue (2019) BDT 285m $W's net margin (2019) ~ before interest costs 3% Bank overdraft interest rate (fixed) 175% Dividends per share (2019) Sp Earnings per share (2019) 9.25p 465% Gearing using book values: debt / (debt + equity) (2019) W's marketing director believes that the expansion into Chattogram and Syihet ‘will generate additional revenue of BDT 6m in 2020 and, because of the impact of fixed costs, itis estimated that the net margin on snr tea sales (before interest costs) would be 5%, SW's management estimates that the 2019 dividend per share will be maintained in 2020 ‘You have been advised that, for the additional long-term funds, shares priced at about 20% below the current market value of BDT 1.55 per senior management wishes to use either (i) A rights issue, with the new share; or ~ ‘An issue of irredeemable debentures with similar debentures in the market. “The corporation tax rate is 30% SW’'s management has assumed that there will be no additional working capital requirements associated with the additional revenue, 1 coupon rate of 10%. Currently investors expect a 12% return on Requirements: {6 Demonstrate how SW's finance director calculated the long-t oT Assuming that SW needs to raise BUT 1,827,777, calculate: {i Its projected earnings per share Figure for 2020 if i raises those funds by a) a rights issue erm funding requirement of BDT 1,827,777. & (b) a debenture issue. 5 fii Sw's projected gearing figure at thc enc! of 2020 fit raises those funds by (a) a rights issue! or (pfa debenture issue. . aa Based $n your workings in (b) above, recommend, with reasons, which, if either, method of Jong-term funding SW's senior management should choos 3 1) Comment on the assumption mace by SW's management that there would be no additional working 3 ‘capital requirements associated with the additional revenue. Prepared by: Pankaj Chandra Bhow mick ‘E-mail: bhownickOId@tgmail.com, Mob: 01677-93737op Nov- Dee 2012 Chapter: 5 Cost of Capital 4.(b) Current EPS of Dhaka Lamps Ltd. is Tk. 20, the assets beta is 0.90, the retention rate is 0.50, the tax rate is, 0.35, the annual growth rate is 8.085%, the debl-equity ratio is 0.12, the risk free rate is 5 per cent and the equity market risk premium is 6 per cent. What is the impact on the price of the share if the debt-equity ratio increases to 0.30. (©) The following financial information refers to NN Ltd: Current statement of financial position Tkm Thm Tkm Assets Non-current assets 101 Current assets Inventory un Trade receivables 2 Cash 10 2 Total assets 143 Equity and liabilities Ordinary share capital 50 Preference share capital 5 Retained earnings ~* 19 Total equity 4 Non-current liabiliti Long-term borrowings 20 Current liabilities ‘Trade payables 2 Other payables “Total current liabilities 29 Total liabilities 49 Total equity and liabilities 143 INN Ltd. has just paid a dividend of 66 paisa per share and has a cost of equity of 12%. The dividends of the company have grown in recent years by an average rate of 3% per year. The ordinary shares of the company have a par value of 50 paisa per share and an ex dividend market value of Tk. 8 30 per share. The long-term borrowings of NN Ltd. consist of 7% bonds that are redeemable in six years time at theit par value of Tk.100 per bond. The current ex interest market price of the bonds is Tk.103 50, The preference shares of NN Ltd: have a nominal value of 50 paisa per share and pay an annual dividend of 8%, The ex div market value of the preference shares is 67 paisa per share. NN Ltd. pays profit tax at an annual rate of 25% per year. Required: {a) Calculate the equity value of NN Lt. using the following by (i) the dividend growth model; : (ii) net asset value. [5 (b) Calculate the after-tax cost of debt of NN Ltd. (€) Calculate the weighted average after-tax cost of capital of NN Ltd. (d) Discuss the factors to be considered in formulating the dividend policy of a stock-exchange listed company. ness valuation methods: Propared by: Pankaj Chanclea Bhownvick E-moil: PhownickOL@gmail.cora, Mob: O1677-693737ne det Re May June 2013 2, (c) Pran Ltd, is a successful food retail company. Over the last five years it has increased its share of the Bangladesh food retail market by 30%. It makes no use of debt and has financed its operations entirely from retained earnings. Pran asa current price/earning ratio of 28 compared with the food retailing sector average of 19. Other financial data relating to the company are shown below: : Figures in Taka 2008 2009 2010 2011 2012 Earning per share 1610 1930-2470 30.50 3580 Net dividend per share 4.86 5.86 750 9.00 11.00 Book value of equity per share 103.00 124.00 142.00 165.00 190.00 Requirements: Estimate the cost of equity capital for Pran Ltd. using the following models: 6x212 (i Dividend growth model (ii) Earning retention model 4. BLLtd. wishes to calculate its weighted average cost of capital and the following information relates to the company at the current time: Number of ordinary shares . 20 million Book value of 7% convertible debt Tk.29 million Book value of 8% bank loan Tk2 million Market price of ordinary shares ‘TKS 50 per share Market value of convertible debt Tk.10741 per Tk-100 bond Equity beta of B Ltd. 12 Rislefree rate of return 47% Equity risk premium . 65% Rate of taxation 30% B Lid. expects share prices to rise in the future at an average rate of 6% per year. The convertible debt can be redeemed at par in eight years’ time, or converted in six years’ time into 15 shares of B Ltd. per Tk100 bond. Required: (a) Calculate the market value weighted average cost of capital of B Ltd State clearly any assumptions that you make. {b) Discuss the circumstances under which the weighted average cost of capital can be used in investment appraisal, Nov- Dec 2013 2(c) Marzan Ltd has recently been incorporated. Directors of Marzan Ltd. are considering five different possible capital structures for the new company. An analysis of comparable companies with equivalent Pesiness tick has been undertaken. The analysis shows that if the before tax cost of debt is a constant 10% inrespeetive of the capital structure, then the cost of equity capital after corporation tax will be as follows: Gearing ratio (debt capital/ total capital) Cost of equity capital % % o 20.0 20 21.625 40 24.333, 50, 26.500, 60 29.750 Prepated by: Pankaj Chandra Bhowsnick Eemait: bhownyick014@gmail.com, Mob: 01677-693737f fe above predictions for the equity cost of capital also + fate of 30% and that the debt interest is the spor assume that the earning of Marzan will be taxed at a nallowable expense for tax purposes, “ors expect that the company will generate a constant anneal carnings stream before the payment of debt interest for the foreseeable future. Requirements: ()) Calculate the effective after tax wei structure, assuming that the before tax structure chosen). 6 (i) Interpret the results of hy ighted average cost of capital for each of the five possible capital annual cost of debt will be a constant 10% (irrespective of the capital (@) What is the equilibrium price of the equity stock of firm A? (Gi) How would the equilibrium price change when (a) the inflation Premium increases by 2 percent, and (b) the beta of A’s equity rises to 1.3, 3 (©) X's equity stock is currently selling for Tk. 30 per share. The dividend expected next year is Tk. 2.00. The investors required rate of return on this stock is 15%. I the constant growth model applies to X limited, wh, the expected growth rate? (2) ¥ Limited's earnings and dividends have been growing at a rate of 18 Percent per annum. This growth rate is expected to continue for 4 years, After that the growth rate will all to 12 percent for the next 4 years. There after the growth rate is expected to be 6 percent forever If the last divideng per share was Tk. 2.00 and {he investors required rate of return on Y's equity is 15 percent, what is the intrinsic value pershare? 10 at is 5 Nov Dec 2014 2 (P) Laraba Lid. is considering an investment which it intends to finance by the issue of new and debentures in a mix which will hold its gearing ratio approximately constant. ane company has an issued share capital of 1 million ordinary shares of Tk. 1 each and also issued Tk. 700,000 8% debentures. The market price of the ordinary shares is Tk. 376 per share and the debentures are priced at 1k. 75. Dividends and interest are payable annually. An ordinary dividend has just been paid, while the next installment of interest is payable in the near future. Debentures are redeemable at par in twenty years time. ordinary shares A summary of the company’s balance sheet as at 31 December 2013 is as follows: Tk. ‘000 Tk. ‘000 Fixed Assets 1.276 Current Assets 4,066 Less: Current liabilities 1925 Net Current assets . 2141 ‘Total assets 3,417 Financed by: Prepared by: Pankaj Chandra Bhowmick E-mail: bhowmickOl@gmail.com, Mob: 01677-683737Ordinary share capital oa Reserves rod Deferred taxation ie Debentures . ” 3417 Dividends and Earnings have been as follows: Year Dividends Earnings Earnings Before tax(‘000) After tax('000) 2009 200 575 350 2010 230 73 452 201 230 682 410 2012 260 853 536 2013 300 905 606 ‘The new investment, which has the same risk characteristics as the ex immediate out! ting projects, would require an lay of Tk, 1,500,000 and would generate an annual net cash inflow of Tk. 500,000 indefinitely. You are required to: (i) Calculate the Weighted Average Cost of Capital (WACC) of the company. l) Discuss briefly any difficulties and uncertainties in your estimation. (i) Prepare calculations showing whether or not the acceptance of the new project is worthwhile. (iv) Appraise the dividend policy of the company. eae , cee May June 2015 : 7 eee 3. Your division is considering two investment projects, éach of which requires An up-front expenditure of Tk 25 mn You estimate thatthe cost of capital is 10% ary thatthe investments will produce the fllowing ater tax cash flows (in Mn BDT): | ——— (i) Whatis the regular payback period for each of the projects? 2 (ii) What is the discounted payback period for each of the projects? az If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? 2 {iv) If the two projects are mutually exclusive and the cost of capital is 5%, which project the firm should undertake? 2 (¥) If the two projects are mutually exclusive and the cost of capital is 15%, which project the firm should undertake? 2 What is the crossover rate? 2 (ii) IF the cost of capital is 10%, what is the Modified IRR (MIRR) of each project? 3 May June 2016 ing)" \gab- 1. (a) Aaban Technologies Ltd. is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. , Assume that you are an assistant to the Chief Financial Officer. Your first task is to estimate Aaban’s cost of capital. CEO has provided you with the following data, which he believes may be relevant to your task: ‘The firm’s tax rate is 40% . ‘The current price of Aaban's 12% coupon, semiannual payment, non-callable bonds with 15 years remaining to maturity is Tk.1153 Prepared by: Pankaj Chanda Bhow E-mail: phowiniskOL4Sgmailcom, Mob: 01677-6987:3 ) 7 N16 2 ¢ G = TBI e Aaban docs not use short term interest bearing debt on a permanent basis. New bonds would be privately _ placed with no flotation cost, : (The current price of the fim's([0%, Tk.100 par value, quarterly divicend, perpetual preferred stock is Tk.1NLO. —_¥ ~ 2 S97 SG = Aaban's common stock is Currently sel for 50 taka per share, Its lst dividend (Do) was Tk.19 and dividends are expected to grow at'a cbiistant rate of 5% in the foreseeable future, Aaban's beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk premium approach, the firm uses a risk premium off4% Aaban’s target capital structure is 30% debt, 10% preferred stock and 60% common equity. To structure the task somewhat, CFO has asked you to answer the following questions. #) What sources of capital should be included when you estimate Aaban’s WACC? Should the component costs be figured on a before-tax or an after-tax basis? Should the costs be historical (embedded) costs or new (marginal) costs? 3 Gi) Whats the market interest rate on Aaban’s debt and its component cost of debt? 3 (iti) Why is there a cost associated with retained earnings? What is Aaban's estimated cost of common equity using the CAPM approach? 3 {iv) What is the estimated cost of common equity using the DCF approach? 3 @ What is the bond-yiel isk-premium estimate for Aaban‘s cost of common equity? 3 (vi) What is your final estimate for re (cost of retained earnings)? a (vii) Aaban estimates that if it issues new common stock, the flotation cost will be 15%. Aaban incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the(lotation co3t? ay la we pe Phe ey — ay 3 if) What is Aaban’s overall or weighted ‘Average cost of capital (WACC)? Ignore flotation cost? What factors influence Aaban composite WACC? Should the company use the composite WACC as the hurdle rate for each of its projects? May June 2017 3. (a) Assuming that share repurchase by the Company is allowed in Bangladesh, Ridwan Co. Ltd. is evaluating an extra dividend versus a share repurchase, In either case, Tk 11,000 would be spent. Current earnings are Tk 1.40 per share and the stock(€iirentlysélls)for Tk 58 per share. There are 2,000 shares outstanding, See Requirements: rs {i) Evaluate the two alternatives in terms of the effect on the price per shate of the stock and sharcholders wealth, —" ~ (ii) What will be the effect on Ridwan's EPS and PE ratio under the two different scenarios? 3 (ii) In the real world, which of these actions would you recommend? Why? 2 Ignore taxes and other imperfections in answering the first two questions. (Nov Dec 2018 3. Heat Wave Limited (HWL) manufactures and fits large scale heating units for factories ane! warehouses, Key information about the company’s equity capital at(il July 2018s shown below: Issued ordinary shares (BDT 1 nominal value) 55 million : Market Value per ordinary share (ex div) BDT 2.20 Price earnings ratio 84 Dividend payout ratio 40% Profit after tax as % of Capital Employed 10% Equity beta a3 Prepared by: Pankaj Chandra Bhowmick Email: bhowmichOL4gmail.com, Mob: 01677-693737Risk free rate 7% Market rate of return n% At 31 July 2018 HWL also had in isswte BDT.10 milli n 9%4"convertible loan stock with a market value of BDT 105 (ex interest), which is redeemable at BDT 1 104 on 31 July 202: Id be converted to 40 ordinary shares at that date. You(should assume\that the market value of HWL's ordinary shares will increase at the same annwal growth rate as its ordinary dividends, 7 - The rate of corporation tax is 28% and is payable in the same year as profits are earned. * (On § August 2018 HWL's board met with representatives of Quality Houschold Ltd. (QHL),a large retailer of household goods. QHL wishes to expand its product line via a new range of small domestic heaters and would WL to manufacture and supply them. HWL would have topurchase new equipment to manufacture the heaters and this would cost BDT 18 million. HWL's board is proposing to raise the BDT 18 milion vis Lan issue (redeemable in July 2026). Alternatively, it could raise the majority of the BDT.18 million a one for ten rights issue of ordinary shares at a 15% discount on the current market price per ordinary share. The balance would come from retained earnings. However, Ahmed Chowdhury, one of HWLs directors, is concerned that a rights issue could be unsuccessful and the company could lose money as a result, Requirements: (2) Calculate HWL’s weighted average cost of capital at 31 July 2018 using the Gordon grovth (or earnings Tetention) model to calculate the cost of equity, . 6 (©) Calculate the cost of equity using the CAPM and explain the reasoning behind the CAPM approach to the cost of equity, comparing the CAPM approach with the earnings retention model used in part), 5 (©) Explain the benefits to a company of using convertible loan stock as a means of raising capital, 3 (4) Assuming that the funds are raised by the debenture issue, discuss whether HWL should use the cost of the newly issued debentures as the hurdle rate when appraising the Value Shopper investment, 4 (©) Discuss Ahmed Chowdhury’s concerns. 2 1. You work as Financial Controller at Padma Paper Ltd. (PPL), a listed Bangladeshi paper manufacturer which has a financial year end of 30 June. PPL currently has a very healthy level of liquid funds (approximately BDT 85 m) in its bank accounts. At the company’s most recent board meeting the following issues were discussed: + should the firm’s current weighted average cost of capital (WACO) figure of 9% be amended? This figure has been used for many years and the directors are concerned that this rate does not represent current-market conditions,” < should the dividend growth model or the capital asset pricing (CAPM) model be used to calculate the waccr ~ should PPL's long-term funding be restructured?~ Cost of capital ‘The figures below have been given to you for the year ended at 30 June 2018: ‘Type of capital Total dividends Total market Total nominal interest (BDT) value (BDT) (nominal value) value (BDT) _| Ordinary shares (10 Tk. per share) 102,960,000 1,330,000,000 | 300,000,000 Preference shares (10 Tk. per share) 3,132,000 54,000,000 20,000,000 Prepared by: Pankaj Chandra Bhovrmick E-mail bhowmiickOL4® gmail.com, Not: 016774693737. L ~~ Trredeemabie debentures (Tk. 100 each) 4,050,000 740,175.00 ‘| 130,500,000 Note 1: All dividends have been paid for the year ended 30 June 2018. Ordinary dividends have been growing; ata steady rate of 5% pa for the past five years. Note 2: All debenture interest payable for the year to 30 June 2018 has been paid. Restructuring the long-term funding . I Itis decided to purchase and cancel all of PPL's irredeemable debentures at their current market value, Issue 8% coupon debentures with a nominal value of BDT 90 million, redeemable in four years’ time et par- Assume that the corporation tax rate will be 25% pa for the foreseeable future. : “Requirements: (a) Using the dividend growth model, calculate PPL's current WACC on 30 June 2018. 6 (b) Giving reasons, advise PPL's directors whether they should use the WACC figure from part (a) when appraising potential investments rather than the current figure of 9%. 3 () Discuss the logic underpinning the CAPM and explain how the CAPM can be used to calculate the WACC. (A) If, at their issue date, the market gross redemption yield for similar redeemable debentures is 9% pa, calculate the issue price of the new redeemable debentures and the total funds raised. 5 ye Pe einen rey 08 ERR IT trovet beteok ut fronds of wu esi pftandnad Rate Se Tpogerie inven to tin CFR tae aM fot , moles Oy y (eet Cat wa beta Unaombed t Wen Bh oun maces | nn Ahab (righ resale ghrnty abonte tpn ote, WENO Main Oat Oe atria, Hake Pray el reeds mayer MOG aga beyel ane 1s i ae Rae beouieg 2 ——t——”—._ FE ote penetrate. (asosbes MET Yes tne ORE RE we endl aSicalar Sete Chessy Wha IRR ay awe Myst ; Ty. Prged— hve Ane Goat 3 g- Compare the price of stock values found under different methods above. Which valuation method do you believe most clearly represents the true value of the Yellow’s stock? 4 Prepare! by: Pankaj Chindra bhow vic Banal bhowmchOM@enmailcom Mob: O1S77-695797h Chapter: 8 Business Planning, Valuation & Restructuring May June 2012 expected growth rate, iii) On the basis of the available information, the best estimate of G's growth rate is 10 per cent. Ome following information is provided relating to the acquiring company Elficient Ltd and the get company Health Ltd: Dee 31, 2010, ~ Evficient Ltd, Health Ltd. No. of shares (F.V. Tk.10 each) 10,000 lakhs 75 lakhs > Market Capitalization 500.00 lakhs 750.00 lakhs P/E ratio (times) 10.00 5.00 Reserves and Surplus 300.00 lakhs 165.00 lakhs Promoter's Holding (No. of shares) 4.75 lakhs 5.00 lakhs ard of Directors of both the companies have decided {0 give a fair deal to the shareholders and accordingly for swap ratio the weights are decided as 40%, 25% ag 35% respectively for Eaming, Book Value andl Maske, Price of share of each company, Required: }) Calculate the swap ratio and also calculate Promoter's holding % after acquisition. 4 5) Whats the EPS of Bticient Ltd, after acquisition of He Lte.23 til) What is the expected market price per share ancl market capitalization of Efficient Ltd. after acquisition, Py) Cale end Eaio of firm Efficient Ltd. remains unchanged. 4 iv) Caleulate free float market capitalization of the merged firm. 3 «Lip Lid. isa listed company which operates in the Pharmaceutical sector, manufacturing a broad range of rugs under licence in a number of countries, Around 75% or the book value of Lip's noncurrent assets comprises factories situated outside Bangladesh, In recent Years the company has grown organically but a proposal has iow been put forward by the company’s invesiment bank that the company might consid ne coh of smaller firm, Bengal Lid. (Bengal), as a route to both further expansion and diversification of the company’s activites. Bengalis involved ina different aac, of the pharmaceutical sector from Lip as it is Primarily a research-drivén company involved in the development of new drugs arising from the latest ademic research, often working with research departments at. universities and teaching hospitals to turn the research into commercial reality, ihe majority of Bengal’s shares are owned by members of the three ‘ork forthe company. They are now considering selling Bengal ifa suit ler the founding families, many of whom still table price can be agreed, Prepared by: Pankaj Chanda Bhownick small: BhowmchO14@gmait coms, Mob: 01677-693737The following financial information has been obtained for Lip, along with comparative information for Bengal: Lip Bengal Forecast earnings in next financial year (Taka million) 750 2.00 Shares in issue (million) 1250 0.75 Current earnings per share (Taka) * 0.5625 0.7650 Current dividend per share (Taka) 0.2530 050 Share price (Taka) 618.50 nfa Book value of equity (Taka million) 175.00 22.50 Gearing ratio (debt as a % of market value) 25.00 0 Forecast dividend growth rate pa 3% 6% Cost of equity 7% n/a Bengal does not calculate a cost of equity, but the average for listed companies operating in the same sector is 8%. At this stage, the directors of Lip have identified either a right issue or a floating rate term Joan as the most likely method by which they might finance the purchase of Bengal. Required: (@) In your role as a corporate finance manager of Lip, prepare a report for Lip's directors providing valuations of Bengal using: . (i) net assets; (ii) dividends; (iii) current and forecast earnings (using Lip’s current price-earnings ratio), and, for each valuation calculated, identify and specific reservations or other issues that you might wish to bring to the attention of Lip’s directors. 16 (b) Evaluate (without undertaking any calculations) the two potential methoils of financing the purchase of Bengal. 8 © Discuss the relative advantages of organic growth and growth by acquisition. 6 May June 2015 2.00) ea are the Chief Financial Officer of a large local group of companies, which owns a brokerage house among a host of other concerns. The owners of the group think that the prospect of a brokerage house in Bangladesh will continue to remain bleak for many more years to come and therefore thinking of disposing of their brokerage company. In order to know the fair value of their brokerage house, they asked you to come up with a fair value that will guide them in taking a final decision. The latest statement of comprehensive income of the brokerage house is as under: Operating Income 2014 2013 Brokerage income 318,314,273, 222,819,991 Direct charges (7,309,485) (0,526,350) FNet Brokerage Income 311,004,788 213,293,641 Interest income 498,744,900 523,379,104 Interest expense (497,745,445) (491,655,692) et interest income 999,55. 31723412 Other operating income 2,251,612, _ ~ Total Operating Income 314,255,855 Operating expenses 7 andl allowances 31,171,404 27,776,567 Rent, taxes, insurance and electricity 14,288,504 z [ Legal expenses : 550,000 280,480 Postage, stamp, telecommunication etc 9 Sera Stationary, printing, advertisement etc 1,360,891 220 Directors! fees & mecting expenses - 391,997 469.964 Prepare by: Paik Chandra Bhownsck 1, Mobs: 01677-693737 ‘E-mail: bhowmickODe 66,122 _| 8.7623 Total Profit before provision 246,411,569 184,157,433 Provision for unrealized loss in dealer account (1,282,500) 11,805,619 Provision for contingency 2,720,000 2,720,000 Total Profitafter provision 244,974,465 169,631,810 Tax expenses 16,687,015 34,145,180 Net Profit after taxation 228287459 [735486634 1 As per brokerage indusiry jargon, the revenue of a and other operating income, From your experience, the brokeragetFever You do not need to consider any revenue stream know that cost of services of the house is 60 percent may remain(60 percent of revenue in next 2 years years, You believe that the/operati in subsequenf3 years, income will rei may remain 8 percent of fevenue in next2 years and will be (D\percento Prevailing tax rate is 37.50 percent. Since your brokerage housé is not a li cing Model (CAPM) to estimate discount rate for will not exceed é\percent per Operating expenses Are around 8 percent of revert brokerage comprises of brokerage income, interest income you know that the maximum growth rate to be expected in year for nex(2years and(é percent for subsequent years. beyond next 5 years. From your historical estimates, you tof the revenue, Therefore, you believe that tof ser and will go up to 62)percent of revenue in subsequent -main Dpercent in next discount rate calculation, you have got the following information from market, 2 years and will go up to.5\percent ie now. You belicve operating icone f revenue in subsequent 3 years. The listed company, you thought of using the brokerage house valuation, For Risk free rate of return 1k = NY AY ERY OL Market return 12.87% © 107, Equity risk premium 187% - Equity beta factor 1.0692 Requirement: What would be the fair price of the brokerage house using Discounted Cash flow Method (ignore the effect of inflation)? Nov Dee 2016 1. a. Assume that you own 100 shares of BTech Ltd, a small software development firm. When you read the Daily Star Business page this morning, BYech’s shares were selling at Tk50. There are 10,000 shares outstanding, with most of those being held by small investors such as yourself. On the way to work, you hear on the radio that a group of ou le investors have managed to acquire 20% of the firm and are attempting a hostile takeover, They are offering Tk 75.a share for any and all outstanding shares. The analyst on the radio goes on to state that, due to the bidder's expertise at managing similar companies, the equity in the firm is expected to be worth Tk1 million if their biel is successful, Assume that there would be no tax effects if you sell your shares, Requirements: (i) Should you sell your shares to the bidder? ¢ Gi) What will happen if everyone makes the same sell/keep decision you do? (iif) What does this imply about the bid price of successful takeover attempts? |. b. (i) “SMEs cannot grow and innovate without access to bank credits, but they also need alternatives when looking for finance”. Discuss. 4 (i) A company obtained a syndicated loan of BDT 2,000 million under the following covenants. 1. Debt service cover (EBITDA/ Debt Service) needs to be at least 2.0 times. Prepared by: Pankaj Chandra Bhowanick E-mail: bhowmickOMstgmail.com, Mob: 0167746937372. Interest cover (EBIT/ Interest expense) should be at least 3.0 times. 3. Debt to EBITDA should not exceed 2.25 times. . Assume the entire debt of the company including the above syndicated loan amourits to BDT 5.00 lla and the total debt is repayable (in equal semi-annual instalments) over a period of 5 years at 14% interest per annum, Requirement: Calculate the minimum EBIT/ EBITDA the company should maintain beginning of year 1 undler each of above covenants, 5 ” Debt Service = Principal served + Interest served (i)The rating advisory of the firm has mentioned that the financial covenants typically demonstrate an AA Ting for the company. Due to the recession, however the company’s sales have declined by 50% from BDT $000 inillion in previous year and EBIT of the company is around 12%. (Depreciation is assumed to be BDT 200 million) ~ Requirements: @) Determine whether the company will satisfy all the covenants ofthe loan stated in (i) 3 (©) The company decides to sell part ofits land to reduce its debt burden. They also foresee that the company's Profitabity (EBIT) would be static for the next few years. Veulate the price at which the land should be sold for the company to maintain the financial covenant on debt service cover (Covenant No. 1), < brielly explain these terminologies used in a loan agreement: () negative pledge of assets (i) default interest it) basis point. 3 @hapta Ltd is contemplating the acquisition of Padma Limited ‘The values of the two companies as separate atities are BDT_30 million and BDT 10 million respectively. Shapla estimates that by combining the two companies, it will reduce marketing and administration costs by BOT 700,000 per year in perpetuity. Shapla can either pay BDT 15 million cash for Padma Limited or offer Padma a 50% holding in Shapla, The opportunity cost of capital is 10%. Requirement (i) Whatiis the gain from merger? 2 (ii) What is the cost of the cash offer? 2 (iii) What is the cost of the stock alternative? 2 (iv) What is the NPV of the acquisition under the cash offer? 2 (v) What is its NPV under the stock offer? 2 May June 2017 2. (a) Discuss four reasons why organisations may decide on a policy of strategic divestment. 3 (b) LTP Company is aggressively pursuing an ic growth strategy but is beginning to be somewhat frusirated by the slow pace of growth. It has deciled Toc acquisition targets. It has identified a UAE company that is willing to discuss a potential takeover if the piice of BDT {Billion (in cash and/or in shares) is met. LTP Company's Investinient department has confirmed that there are no significant concemns to impede the takeover. LTP Company's Board of Directors are of the opinion that the BDT 10 Billion price is acceptable to them. The only decision to be made is whether the purchase consideration should be cash and/or share. Requirement: Asa Finance Manager, prepare a briefing note for the Board of LTP Company outlining the attractions and. drawbacks of both cash and share as purchase consideration. a 6 Prepared by: Pankaj Chandra Bhowevich E-mail bhovemniekD Mgmailcom, Mob: 01677-69373?«0 Dee 2017 2 ¥ ne pa dave been approached for financial advice by the management of a client, Epic Cables Ltd, a following infemeney, EPIC Cables was established in 1990 and formed the platform for growth. The "6 information relates tothe proposed financing scheme for a management buy-out of Epic Cables, . % Taka’000 Share capital held by Management : 40 100 Institutions 60 150 250 10% redeemable cumulative preference shares (redeemable in ten years’ time and all sold to institutions) "4,200 1,450 Clearing bank Loans 700 Overdraft facilities (currently 12% per annum) 700 2,850 Loans are repayable over the next five years in equal annual instalments, They are secured on various specific assets, including properties. Interest is 12% per annum. Epic Cables is at present part of a much larger organisation, which considers this segment to be no longer compatible with its main line of business. This is despite the fact that Epic Cables has been experiencing, growth in revenue in excess of 10% per annum, ‘The assets to be acquired havea book value of Taka 2,250,000, but the agreed! price was Taka 2,500,000 Requirements: (a) What is the difference between: (i) a management ‘buy-in' and a management ‘buy-out (ii) ‘sell-off and a'spin-off? . 4 (b) Outline briefly the majoretvantages and(disad vantages of ‘a management buy-out. 4 (©) Write a report to the buy-out team of Epic Cables Ltd appraising the financing scheme. Your report should includegiifer alia, the cash flow implications of the proposed scheme 9 (cl) What problems are likely to be encountered in assembling a financing package in a management buy-out of a service company, as opposed to a manufacturing company? 3 May June 2019 2.(b) You are a shareholder in Best Air Ltd, a listed company with ai share] capital of (10 jhillion ordinary BDT 1 shares with a €urrent market pricdof BDT(1.80)per share at the close of business ‘yesterday afternoon, Today you are to attend the company's annual general ‘meeting, and just before the meeting begins you are in conversation with a number of fellow shareholders, (1) The first shareholder is Saidur Rahman who owns 2,600 shares in Best Air Ltd, He expresses preat concern that before the market opened this morning the company announced is intention to pursue a I-for-2 rights issue at BDT 1.00 per share to raise funds for a new project that it claimed has a(fiet present value jof BDT 2 million, ‘This massive discount o the market price is appalling, and the consequent fallin the share-price will be bad news for me - @) The second shareholder, Shafiq Ahmed, praduces a recent investment bank report that hints at a possible acquisition by Best Air Ltd of its principal competitor. The report states that the annual cash flows of Best Air are currently BDT 4.2 million and that 'an appropriate discount rate for these cash flows is 12%'. The report goes on to estimate that combined annual cash flows would total BDT_68 million and that ‘the appropriate discount rate for these cash flows is 10%'. Ahmed’s concern is that he does not know what would be a Prepared by: Pankaj Chandra Bhowrck E-mail: thowmick0ld@gmail.com, Mob: 01677-69373?20, 201 reasonable price for the directors to pay in such circumstances, as the report makes no reference to lik purchase price. (0) The third shareholder is Jannatul Ferdous, who is concerned by rumours that Best Air Lt to cut its dividend, because she has read that a cut in dividend by another company adversely company's share price. At the same time, however, Ferdous mentions that a friend has sugg: ‘company's dividend policy is irrelevant. She is confused. might be about affected that sted that a Requirements: (i) Advise Mr. Rahman of his various options in such a scenario, making clear to hinv tite expected ex-rights price of the company's ordinary shares, how rwuch he could reasonably sell his rights for (if he chose to) and provide calculations to illustrate to hit the effect on his wealth of each of the options available to hiny 6 (ii) Calculate for Mr. Ahmed the“maximum price the directors of Best Air Ltd should consider paying for this acquisition, and advise him of the potential reasons why the directors of Best Air Ltd might recommend)an acquisition to their shareholders. af (iil) Oulline to Ms. Ferdous the theoretical and practical positions regarding, the relevance or otherwise of a company's a nae 5 idend policy, Noy Dee 2019 6. SBN, one of the largest plant wholesalers in Bangladesh, was poised for expansion, Through strong profitability, a conservative dividend policy, and some recent realized gains in real estate, SBN has a strong, Cash position and was searching for a target company 16 acquize. The executive members on the acquisition search committee had agreed that they preferred to find a firm in a similar line of business rather than one that Would provide broad diversification, It would be their first acquisition) and they preferred to stay in a familiar line of business, Abdur Rahman, Director of Marketing, had identified the targeted lines of business through exhaustive market research. as Mr. Rahman had determined that the Servicing of plants)in large commercial @llicesghotels,Zo0s, and theme parks would complement the existing wholesale distribution businessy Frequently SBN was requested by its forge clients to bid on a service contract, However, the company was neither staffed nor equipped to enter this market, Mr. Rahman was familiar with the major plant service companies in the places nearing Dhaka and had suggested GPC as an acquisition target because ofits significant market share and excellent reputation GPC had successfully commercialized a market that had been dominated by small local contractors and in house landscaping departments, Begirining with a contract from one of the largest theme parks in the Bangladesh. GPC’sgrowth in sales)has compounded remarkably over the fast 8 years}GPC had also been selected because of its large portfolio of Jong ~term service contracts with several major DSE listed companics These contracted clients would provide a{captive customers base|for the(wholesale distribution of SBN plants products. — : Jaa confefence Mr, Rahman offered a proposal for merger to the GPC President. GPC President had reacted favourably and subsequently provided financial data including GPC's earnings records and current balance 1d Table-2. - sntal cash\after taxe3 from the acquisition would be Tk,18,750,000, 000 for year 4; Tk. 24,000,000 for year 5; and Tk. 25,000,000 f return of at leasti6%)on an sheet. These data are presented in Table-1 ar ‘The CFO of SBN had estimated Uh for year J and 2; Tk, 20,500,000 for yéar 3; TK. 21,75 for year$ 6 through 30. He also estimated that the company should eam a Fate investment of this type. Additional financial data are given in Table-3. TABLE-1 GPC Farning records Year EPS Year EPS 2011 220 2015 285 2012 5 2016 3.00 Prepared by: Pankaj Chandes Boveri. E-mail bhowmishDI4@zmailcam, Mob 01677-0987)