UNIT: ACCT6004 - Finance - Examination
TIME ALLOWED: Four hrs + 10 minutes together with file obtain and submission add
PERMITTED MATERIALS: That is an OPEN BOOK examination the place using unit research sources corresponding to textbooks and tutorial supplies is permitted. Your accomplished Phrase doc is submitted by way of Turnitin, therefore tutorial requirements of referencing and originality are necessary.
Just one try is permitted.
You need to full your examination on this doc.
Add your accomplished examination doc by [exam completion time] utilizing the hyperlink within the Examination folder of the Evaluation Duties and Submission part of the ACCT6004 MySCU studying website.
The examination has 6 most important questions and all questions are obligatory.
Sort your solutions beneath every query. You'll be able to broaden the area beneath every as wanted.
Workings for calculations have to be proven for full marks. You'll be able to present workings by typing them or you'll be able to paste the related a part of a spreadsheet you will have used.
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STUDENT NAME: ...........................................................................
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QUESTION 1 (5 marks)
(a) Give an instance of a main market transaction and a secondary market transaction and clarify how they differ.
(b) An assumed firm aim underlies most strategies in monetary administration. What's that aim? Give an instance of a way now we have lined within the unit which makes use of this assumed aim.
QUESTION 2 (10 marks)
A authorities bond has three years to maturity, a par worth of $100 and a hard and fast semi-annual coupon price of 5% p.a.
(a) What's the worth of this bond in every of the next conditions? (5 marks)
i. Buyers require a YTM of 5% p.a. (For this half solely, you should not have to point out workings however you will need to briefly clarify your reply.)
ii. Buyers require a YTM of eight% p.a.
(b) State and clarify the overall bond valuation precept exemplified by your leads to half (a). (5 marks)
QUESTION three (20 marks)
(a) The desk beneath consists of data ABC Ltd, X Ltd and a portfolio of ABC and X. Calculate the lacking figures (labelled A, B, C, D and E) within the desk beneath. (eight marks)
(b) Clarify the advantage of investing within the portfolio in (a), slightly than one of many particular person firms. (7 marks)
(c) Write a quick interpretation of the beta for ABC and the beta for X. (5 marks)
QUESTION Four (25 marks)
Chopper Manufacturing Ltd is contemplating whether or not the corporate ought to undertake Mission X, which entails the manufacturing and distribution of an up to date sort of espresso grinder. The corporate has paid $100,000 for a feasibility evaluation of the undertaking, which has offered the next data.
Forecasts for Mission X are gross sales of 100,000 items per yr at a worth of $80 every. Variable prices per grinder will likely be 70 per cent of income and the undertaking can have a Four-year life.
Mounted prices for the undertaking will likely be $Zero.6 million per yr and Chopper might want to make investments a complete of $Zero.eight million in new manufacturing gear to undertake the undertaking. Annual depreciation of the gear for tax functions will likely be $Zero.2 million per yr. On the finish of the undertaking life, the gear is anticipated to be bought for $Zero.1 million. To help Mission X, working capital will have to be elevated up entrance by $Zero.Four million however this funding is anticipated to be totally recovered within the final yr of the undertaking.
Chopper pays firm earnings tax at a price of 30 per cent and has different taxable earnings, which it could possibly scale back with any loses from Mission X and therefore scale back its tax. The corporate has a WACC of eight%.
(a) You may have been given the next spreadsheet exhibiting incremental money flows of the undertaking. Establish and proper the errors on this evaluation. (10 marks)
To do that, you'll be able to edit the desk beneath with the corrections. For those who want, you'll be able to copy it right into a spreadsheet, appropriate it after which paste it again into this doc.
Figures in $thousands and thousands
12 months Zero 1 2 three Four
Income 80 80 80 80
Variable prices -5.6 -5.6 -5.6 -5.6
Feasibility evaluation -Zero.1
Mounted prices -Zero.6 -Zero.6 -Zero.6 -Zero.6
Depreciation -Zero.2 -Zero.2 -Zero.2 -Zero.2
Revenue earlier than tax -Zero.7 73.6 73.6 73.6 74.2
Tax -Zero.21 22.08 22.08 22.08 22.26
Revenue after tax -Zero.49 51.52 51.52 51.52 51.94
Gear money flows -Zero.eight Zero.1
Working capital money flows -Zero.Four
Internet money flows -1.69 51.52 51.52 51.52 52.04
Notes on gear salvage:
Market worth at salvage Zero.1
Guide worth at salvage Zero
Taxable achieve (loss) Zero.1
Tax on salvage Zero.03
(b) What must be thought-about earlier than utilizing the corporate’s WACC because the low cost price for this undertaking and why? (three marks)
(c) Assume the NPV of the undertaking is $three.5 million. Ought to the corporate settle for or reject the undertaking? Briefly clarify, together with a touch upon the anticipated influence on agency worth (three marks)
(d) The graph beneath exhibits the outcomes of a sensitivity evaluation of the undertaking. Interpret these outcomes, together with managerial implications. (Four marks)
QUESTION 5 (20 marks)
You may have the next data on Pound Industries Ltd:
Debt/Belongings Ratio Bond Ranking After-tax price of debt WACC
Zero% n/a Four.eight% 12.00%
10 Aa Four.eight 11.64
20 Aa 5.Zero 11.32
30 A 5.Four 11.10
40 Baa 6.Zero 11.04
50 Ba 7.2 11.40
60 Caa 9.Zero 12.36
(a) What's the firm’s optimum capital construction and why? (6 marks)
(b) Use theories of capital construction to elucidate why Pound Industries’ WACC would at first lower after which enhance as extra debt is used within the capital construction. (14 marks)
QUESTION 6 (20 marks)
Assume an ideal market world aside from the next: tax on dividends is bigger than the tax on capital positive factors within the arms of shareholders, there are transaction prices (together with issuance prices), and knowledge asymmetry exists between managers and shareholders. Given these assumptions, companies are behaving irrationally in the event that they proceed to pay dividends whereas additionally issuing new shares to lift funds for funding alternatives. Clarify and critique this assertion, referring the place related to distribution coverage theories in your dialogue.
END OF EXAM