1. Which one of the following factors is not considered in calculating the firm’s cost of equity?

1. risk free rate of return
2. beta
3. interest rate on corporate debt
4. expected return on equities
5. difference between expected return on stocks and the risk free rate of return

2. Which one of the following factors is not considered in calculating the firm’s cost of capital?

1. cost of equity
2. interest rate on debt
3. the firm’s marginal tax rate
4. book value of debt and equity
5. the firm’s target debt to equity ratio

3. A firm’s leveraged beta reflects all of the following except for

1. unleveraged beta
2. the firm’s debt
3. marginal tax rate
4. the firm’s cost of equity
5. the firm’s equity

required rate of return = 15%

year

1. make a spreadsheet using excel to calculate irr, mirr, npv,

2. using excel, draw npv profile and find "two" IRRs.

3. based on the analysis, should you take on this project?

a) The continuity of a business may be influenced by its earnings power and concise forecasting for valuation. Explain the elements that impacts earnings forecasts.

b) The following information has been extracted from the statement of income of ABC Ltd for the year 2016 and 2017.

2017 2018

sh'000 sh'000

sales 190,554   176,781

cost of goods sold 77,741 72,490

______________ _______________

gross profit 112, 813 104,291

selling, general and adminisrative expenses 90,377 81,509

Depreciation, depletion and amortization 6,316 5,907

_____________    ______________

operating profit 16,120 16,875

interest expense 0 148

Non operating income 2,930 2,363

______________   ______________

profit before tax 19,050 19,090

tax 7,811 8,010

______________   ______________

Net income 11,239 11,080

______________ ______________

Required:

i) perform a vertical common size analysis for the two years

ii) Explain how the figures obtained in (i) above may influence your forecasts for the year 2018

1. After going over her budget, a dairy farmer has determined that she can afford to pay KES 632 per month towards a milk packaging machine. She calls up her local bank and finds out that the going rate is 12% per month for 48 months. How much is she able to borrow and repay?

Wizard Inc. has to choose between two mutually exclusive projects. If it chooses project A, Wizard Inc. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 11%?

A. $18,097

B. $14,807

C. $9,871

D.$16,452

E. $11,516

Wizard Inc. is considering a five-year project that has a weighted average cost of capital of 14% and a NPV of $80,720. Wizard Inc. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?

A. $22,336

B. $19,985

C. $29,390

D. $28,214

E. $23,512

Halliford Corporation expects to have earnings this coming year of $ 2.72 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 53 % of its earnings. It will then retain 20 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 24.62 % per year. Any earnings that are not retained will be paid out as dividends. Assume​ Halliford's share count remains constant and all earnings growth comes from the investment of retained earnings. If​ Halliford's equity cost of capital is 10.8 %​, what price would you estimate for Halliford​ stock? ​Note: Remenber that growth rate is computed​ as: retention rate times rate of return.

What is the price per share?

a) the information in the statement of comprehensive income if used with information in the other financial statements help external users answer several questions. State and briefly explain the qusetions that can be answered by analysing the statement of comprehensive income.

b) Analysis of earnings quality is often affected by an analyis of receivables and their collectability. The analyst must be alert to changes in the allowance computed relative to sales, receivables or indusry and market conditions. Two key questions arise for the analyst:

i) collection risk

ii) authenticity of receivables

Explain the key issues or questions an analyst should consider when analysing:

i) collection risk

ii) authenticity of receivables

c) Explain any six methods/ ways a firm can undertake earnings management

Question 2

Orange Inc. is considering two mutually exclusive projects (i.e., can choose either one but not both), Alpha in Country A, and Beta in Country B. Project Alpha requests an initial investment of $300,000 and has projected annual cash flows of $20,000, $50,000, $50,000 and $350,000 over 4 years. Project Beta requests an initial investment of $88,000 and has projected cash flows of $12,000 for the first year, and then the cash flows are projected to grow at a constant rate of 5 percent per year forever. Based on the project characteristics, the company requires an 15 percent return for Project Alpha but requires an 17 percent for Project Beta.

You require a 15 percent return on your investment and a payback period of 3 years.

1. If the company requires a maximum payback period of 4 years, which investment will you choose according to the payback criterion? Why?
2. If you apply the NPV criterion, which investment will you choose? Why?
3. Name three disadvantages of the payback period
4. Based on your answer in (a) and (b), which project will you finally choose? Why?

Question 3

Parker & Stone, Inc., is considering a new project that requires an initial fixed asset investment of 1.2 million. The project also requires an initial investment in net working capital of $250,000. The project is expected to generate $950,000 in sales and cost $400,000 every year for three years. The fixed asset follows a straight-line depreciation. After three years, the fixed asset has a zero book value but is estimated to have a market value of $200,000, and the net working capital will fully recovery. The corporate tax rate is 35%.

1. What are the operating cash flows in each year?
2. What are the cash flows from net working capital and the net capital spending in year 3?
3. What are the CFFA in each year?
4. If the required return is 10% for a similar risk level of project, should the company implement this project?

Question 4

At year beginning, you observed that the price of stock Apple was $100 and the price of Stock Orange was $900. To understand the relation between risk and return, you keep watching on the performance of the stock and the bond over the next three years. The information you observed is as follows:

1. What is the stock Apple’s dividend yield in year 2? What is the Stock Orange’s capital gains yield in year 3?
2. During the 3-year observation period, what are the average annual total return of Apple and Orange?
3. Based on the lessons learned from the capital market history, discuss your interpretation of “higher risk and higher expected return”.

Question 5

Consider the following stock information about Tencent and HSBC

1. What’re the expected return on each stock?
2. What’re the standard deviation on each stock?
3. The risk free rate is 1.5%. Based on the CAPM, If Tencent’s market beta is 1.5, what’s the beta of HSBC?
4. If you invested 65 percent in Tencent and 35 percent in HSBC, what is your portfolio expected return? The standard deviation? .
5. Given the portfolio information in (d) and beta information in (c), what is the portfolio’s market beta? .

Question 6

SmartCar Corporation has 1 million shares of common stock outstanding, 20,000 shares of preferred stock outstanding, and 40,000 corporate bonds outstanding. The common stocks sell for $25, with a market beta of 1.5. The corporate bonds sell for $950 and the current YTM is 5%. The preferred stock currently sells for $100, with an annual dividend payment of $8 per share. The risk-free rate is 2% and the market expected return is 8%. SmarCar’s corporate tax rate is 35%. What is SmartCar’s cost of capital?

Suppose you are a fund manager, currently managing a diversified risky portfolio that consists of equity index fund A (40%), bond index fund B (30%), and international equity fund C (30%). The portfolio has an expected rate of return of 12% and a standard deviation of 25%. Lisa, a project manager in IBM, is one of your clients. After some discussion with her, you suggest Lisa to invest her total $800,000 personal wealth in your fund and a T-bill money market fund, which has a return of 4%. You can assume the quadratic utility function for some of the following analysis.

a) If Lisa chooses to invest 70% of a portfolio in your fund and 30% in the T-bill, what is the expected value and standard deviation of the rate of return on her portfolio?

b) Suppose that Lisa prefers to invest in your fund a certain proportion so that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio’s standard deviation will not exceed 18%. What is the investment proportion of your fund in Lisa’s new portfolio? What is the expected rate of return on her overall portfolio?

c) From Lisa’s risk preference questionnaire, you learnt that her risk-aversion coefficient is A = 1.2. What proportions of the total investment should you suggest that she invest in your fund and the T-bill, respectively?

d) Assume Lisa still keeps her allocation as in part a), i.e., 70% in your fund and 30% in the T-bill. Few weeks later, Lisa is granted some IBM company’s stocks worth $200,000, as bonus of the year. By looking at historical return data, you provide her with the following forecast information. What’s the expected return of Lisa’s new portfolio that includes IBM? What’s the standard deviation of her new portfolio?

e) Continue with question d). Now Lisa decides to choose one of the following: i) keep all IBM stocks in her current portfolio; ii) sell all IBM stocks and invest the $200,000 in the previous held portfolio (70% your fund and 30% in the T-bill). Which one will you recommend? Please explain why.

7. Please solve in Excel and round to 3 decimal places:

The original cost of the new production line is estimated at $3 million and falls into 3 year MACRS. This is a 3 year project. Expected annual sales are $2,950,000 per year, with associated annual costs of $1,250,000. The project requires a net working capital of $375,000. They can usually sell their production lines for 40% of their original costs at the end of the project. The tax rate is 32% and the relevant interest rate is 15%.

a. What is the relevant cash flow for year 0?

b. What is the OCF for year 1 (please solve in Excel)?

c. What is the after tax salvage value of the production line (please solve in Excel)?

Question 1) You invest $100,000 today in an online savings account for 5 years. If the interest rate is 4% p.a., calculate the future value under each of the following scenarios:

a) Interest rates are compounded annually
b) interest rates are compounded monthly

Question 2) You expect to receive $50,000 from your superannuation in 3 years from today. If the interest rate is 8% p.a., calculate the future value under each of the following scenarios:

a) interest rates are compounded annually
b) interest rates are compounded quarterly

Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 4%, and the market’s average return was 12%. Performance is measured using an index model regression on excess returns.

a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places. Answer must be in percentages)

b. Which stock is the best choice under the following circumstances?

Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2,000 and a cash inflow the following year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 8%. Currently, 1 U.S. dollar will buy 0.85 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 2.6%, while similar securities in Switzerland are yielding 1.3%.

1. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project? Round the net present value to the nearest cent and rate of return to two decimal places.

   NPV = $----------------  

   Rate of return =---------------------- %

2. What is the expected forward exchange rate 1 year from now? Do not round intermediate calculations. Round your answer to two decimal places.

   ------------Swiss franc (SF_r) per U.S. $

3. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine? Do not round intermediate calculations. Round the net present value to the nearest cent and rate of return to two decimal places.

   NPV = ---------- Swiss francs

   Rate of return =---------- %