Galaxy Industries Limited is a large publicly listed company and is the market leader in vacuum cleaner
manufacturing in New Zealand. The company is looking to set up a manufacturing plant overseas to produce a
new line of commercial vacuum cleaners. This will be a six-year project. The company bought a piece of land
four years ago for $ 8 million in anticipation of using it for its proposed manufacturing plant. If the company
sold the land today, it would receive $ 10.25 million after taxes. In six years the land can be sold for $11.5 million
after taxes and reclamation costs. Galaxy Industries Ltd wants to build a new manufacturing plant on this land.
The plant will cost $295 million to build.

The following market data on Galaxy Industries Ltd are current:

The following information is relevant:
• Galaxy Industries Ltd’s tax rate is 28%.

The project requires $ 8.5 million in initial net working capital in year 0 to become operational.
• The company had been paying dividends on its ordinary shares consistently. Dividends paid
during the past five years is as follows

The manufacturing plant has a ten-year tax life, and the company uses Diminishing value method of depreciation at 25% per annum for the Plant.

At the end of Year 6, the Plant can be scrapped for $ 52 million. The company estimations show that 280,000 vacuums are manufactured and sold per year (Years 1-6) and selling price per unit in year one is $2,100, but the price will increase by 2% per year. Similarly, the variable costs per unit are expected to be $900 for year one but will increase by 2.5% per year in the subsequent periods. The project will incur $220 million per annum in fixed costs (fixed costs includes coupon payments to bondholders). At the end of year 6, the company will sell the land.

Required:
1. Calculate the project’s initial, (time 0) cash flows.

2. Compute the weighted average cost of capital (WACC) of Galaxy Industries Ltd. Show all workings and
state clearly any assumptions underlying your computations.

3. Using the WACC computed in part (2) above and assuming the following, compute the project’s Net
Present Value (NPV), Internal Rate of Return (IRR) and the Profitability Index (PI).
Note: Work all solutions to the nearest two decimals, show depreciation table, calculate gain/loss on the sale of Plant, and Land. Record tax effects in the income statement.

K Co. is a publicly listed company involved in the production of highly technical and sophisticated electronic components for complex machinery. It has a number of diverse and popular products, an active research and development department, significant cash reserves and a highly talented management who are very good in getting products to market quickly.

A new industry that K Co. is looking to venture into is biotechnology, which has been expanding rapidly and there are strong indications that this recent growth is set to continue. However, K Co. has limited experience in this industry. Therefore, it believes that the best and quickest way to expand would be through acquiring a company already operating in this industry sector.

Discussions taken place about the possibility of acquiring Tee Co. being acquired by K Co. Price of Tee company in stock market during last one year are as follows.

Price at the end of month

1. Calculate average return for both stock and market
2. Calculate Standard deviation for both
3. Calculate coefficient of variation for both
4. Calculate Beta of stock
5. Suggest what you understand from Beta

K Co. is a publicly listed company involved in the production of highly technical and sophisticated electronic components for complex machinery. It has a number of diverse and popular products, an active research and development department, significant cash reserves and a highly talented management who are very good in getting products to market quickly.

A new industry that K Co. is looking to venture into is biotechnology, which has been expanding rapidly and there are strong indications that this recent growth is set to continue. However, K Co. has limited experience in this industry. Therefore, it believes that the best and quickest way to expand would be through acquiring a company already operating in this industry sector.

Discussions taken place about the possibility of acquiring Tee Co. being acquired by K Co. Price of Tee company in stock market during last one year are as follows.

Price at the end of month

1. Calculate average return for both stock and market
2. Calculate Standard deviation for both
3. Calculate coefficient of variation for both
4. Calculate Beta of stock
5. Suggest what you understand from Beta

Bruhaha Ltd (BL) is an Australian publicly listed firm on the ASX. The company has a long-term target capital structure of 50% ordinary equity, 10% preference shares, and 40% debt. All shareholders of BL are Australian residents for tax purposes.

To fund a major expansion BL Ltd needs to raise a $200 million in capital from debt and equity markets.

BL’s broker advises that they can sell new 10 year corporate bonds to investors for $105 with an annual coupon of 6% and a face value of $100. Issue costs on this new debt are expected to be 1% of face value.

The firm can also issue new $100 preference shares which will pay a dividend of $7.50 and have issue costs of 2%.

The company also plans to issue new ordinary shares at an issue cost of 2.5%. The ordinary shares of BL are currently trading at $4.50 per share and will pay a dividend of $0.15 this year. Ordinary dividends in BL are predicted to grow at a constant rate of 7% pa.

1. Calculate the total value and the quantity of debt BL will need to issue to maintain their target capital structure.
2. What will be the appropriate cost of debt for BL?   
3. Calculate the total value and quantity of preference shares BL will need to issue to maintain their target capital structure.
4. What will be the appropriate cost of preference shares for BL?   
5. Calculate the total value and quantity of ordinary shares BL will need to issue to maintain their target capital structure.   
6. What will be the appropriate cost of ordinary equity shares for BL?   
7. Calculate the Weighted Average Cost of Capital (WACC) for BL Ltd following the new capital raising.   
8. BL Ltd has a current EBIT of $1.3 million per annum. The CFO approaches the Board and advises them that they have devised a strategy which will lower the company’s cost of capital by 0.5%. How will this change the value of the company? Support your answer using theory and calculations.   

Please present all your workings including formulas.

ardano and Sons is a large, publicly held company that is considering leasing a warehouse. One of the company’s divisions specializes in manufacturing steel, and this particular warehouse is the only facility in the area that suits the firm’s operations. The current price of steel is $783 per ton. If the price of steel falls over the next six months, the company will purchase 575 tons of steel and produce 63,250 steel rods. Each steel rod will cost $20 to manufacture and the company plans to sell the rods for $35 each. It will take only a matter of days to produce and sell the steel rods. If the price of steel rises or remains the same, it will not be profitable to undertake the project, and the company will allow the lease to expire without producing any steel rods. Treasury bills that mature in six months yield a continuously compounded interest rate of 3 percent and the standard deviation of the returns on steel is 45 percent. Use the Black-Scholes model to determine the maximum amount that the company should be willing to pay for the lease. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Moon Inc., a publicly listed company, has a building with an initial cost of $400,000. At December 31, 2020, the date of revaluation, accumulated depreciation amounted to $110,000. The fair value of the building, by comparing it with transactions involving similar assets, is assessed to be $330,000. Prepare the journal entries to revalue the building under the revaluation model using:

the asset adjustment (direct) method

the proportionate method

Use the information from 1 above. On January 5, 2021, Moon sold the building for $325,000 cash. Prepare the journal entries to record the sale of the building after having used

the cost model

the revaluation model using the asset adjustment method

the revaluation model using the proportionate method.

Would a potential investor prefer Moon Inc. use the asset adjustment method or the proportionate method to apply the revaluation model, why?