Question

Q4(b)
A U.K. company is deciding between two mutually exclusive projects with the following costs and expected net cash flows:
Year	Project 1	Project 2
0	−£8,000,000	−£8,000,000
1	£5,340,000	£5,740,000
2	£3,835,000	£3,835,000
3	£5,590,000	£1,595,000
The company uses a discount rate of 8% for all projects and accepts all projects with a payback period of less than 5 years.
Which project is acceptable based on NPV (expressed in £) and based on payback period? Which choice is aligned to the goal of maximising shareholders' wealth?

Q6(b)
A company issues a $280 million IPO. The offer price is set to $10 per share. The underwriter’s spread is 8%.
The underwriter has agreed to a best-effort arrangement.
For issuing the IPO, the company will pay some admin costs. The admin costs include a legal fee of $50,000, an accountant fee of $35,000 and other admin costs amounting to $85,000. The company’s share price increases by 5% at the end of the first day of trading.
i.   Determine the company’s total cost of issuing the securities..
ii. Determine proceeds available to the underwriter and to the issuer if 92% of the shares are sold.	(1 mark)
iii. Who bears more risk under the current arrangement? The underwriter or the issuer? Why?	(1 mark)
iv. How will the proceeds available to the issuer and to the underwriter change for a stand-by arrangement?       note: if you find any incomplete question, just use your assumptions.

Answer 1

Conclusion:
Based on Payback period, Project 2 should be accepted.

Based on NPV, Project 1 should be accepted.

Project A align to the goal of maximising shareholders' wealth.