问答题

Chad Co is a stock-market-listed company which has managed to increase earnings over the last year. As a result,the board of directors has increased the dividend payout ratio from 40·0% for the year to March 2014 to 41·4% forthe year to March 2015. Chad Co has a cost of equity of 12·5%. The following information is also available:
The nominal value of the ordinary shares of Chad Co is $0·50 per share. Listed companies similar to Chad Co havean earnings yield of 8·2%. Required:(c)Discuss the relative merits of the dividend growth model and the earnings yield method as a way of valuing Chad Co. (5 marks)

答案： Cash-flow valuation models tend to be preferred to profit-ba...

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Rose Co expects to receive €750,000 from a credit customer in the European Union in six months’ time. The spotexchange rate is €2·349 per $1 and the six-month forward rate is €2·412 per $1. The following commercial interestrates are available to Rose Co:
Rose Co does not have any surplus cash to use in hedging the future euro receipt. Required:(a)Evaluate whether a money market hedge or a forward market hedge would be preferred on financial grounds by Rose Co. (5 marks)

答案： Forward market hedge: The dollar value of a forward market h...

Chad Co is a stock-market-listed company which has managed to increase earnings over the last year. As a result,the board of directors has increased the dividend payout ratio from 40·0% for the year to March 2014 to 41·4% forthe year to March 2015. Chad Co has a cost of equity of 12·5%. The following information is also available:
The nominal value of the ordinary shares of Chad Co is $0·50 per share. Listed companies similar to Chad Co havean earnings yield of 8·2%. Required:(a)Calculate the equity market value of Chad Co using the dividend growth model. (3 marks)

答案： As the payout ratio has increased from 40·0% in the year to ...

Rose Co expects to receive €750,000 from a credit customer in the European Union in six months’ time. The spotexchange rate is €2·349 per $1 and the six-month forward rate is €2·412 per $1. The following commercial interestrates are available to Rose Co:
Rose Co does not have any surplus cash to use in hedging the future euro receipt. Required:(b)Briefly explain the nature of a forward rate agreement and discuss how a company can use a forward rateagreement to manage interest rate risk. (5 marks)

答案： A forward rate agreement (FRA) can fix the borrowing rate on...

Chad Co is a stock-market-listed company which has managed to increase earnings over the last year. As a result,the board of directors has increased the dividend payout ratio from 40·0% for the year to March 2014 to 41·4% forthe year to March 2015. Chad Co has a cost of equity of 12·5%. The following information is also available:
The nominal value of the ordinary shares of Chad Co is $0·50 per share. Listed companies similar to Chad Co havean earnings yield of 8·2%. Required:(b)Calculate the equity market value of Chad Co using the earnings yield method. (2 marks)

答案： Equity market value using the earnings yield approach: Earni...

The finance director of Widnor Co has been looking to improve the company’s working capital management. Widnor Co has revenue from credit sales of $26,750,000 per year and although its terms of trade require all creditcustomers to settle outstanding invoices within 40 days, on average customers have been taking longer. Approximately1% of credit sales turn into bad debts which are not recovered. Trade receivables currently stand at $4,458,000 and Widnor Co has a cost of short-term finance of 5% per year. The finance director is considering a proposal from a factoring company, Nokfe Co, which was invited to tender tomanage the sales ledger of Widnor Co on a with-recourse basis. Nokfe Co believes that it can use its expertise toreduce average trade receivables days to 35 days, while cutting bad debts by 70% and reducing administration costsby $50,000 per year. A condition of the factoring agreement is that the company would also advance Widnor Co 80%of the value of invoices raised at an interest rate of 7% per year. Nokfe Co would charge an annual fee of 0·75% ofcredit sales. Assume that there are 360 days in each year. Required:(a)Advise whether the factor’s offer is financially acceptable to Widnor Co.(7 marks)

答案： The factor’s offer will be financially acceptable to Widnor ...

Chad Co is a stock-market-listed company which has managed to increase earnings over the last year. As a result,the board of directors has increased the dividend payout ratio from 40·0% for the year to March 2014 to 41·4% forthe year to March 2015. Chad Co has a cost of equity of 12·5%. The following information is also available:
The nominal value of the ordinary shares of Chad Co is $0·50 per share. Listed companies similar to Chad Co havean earnings yield of 8·2%. Required:(c)Discuss the relative merits of the dividend growth model and the earnings yield method as a way of valuing Chad Co. (5 marks)

答案： Cash-flow valuation models tend to be preferred to profit-ba...

Grenarp Co is planning to raise $11,200,000 through a rights issue. The new shares will be offered at a 20%discount to the current share price of Grenarp Co, which is $3·50 per share. The rights issue will be on a 1 for 5basis and issue costs of $280,000 will be paid out of the cash raised. The capital structure of Grenarp Co is asfollows:
The net cash raised by the rights issue will be used to redeem part of the loan note issue. Each loan note has anominal value of $100 and an ex interest market value of $104. A clause in the bond issue contract allows Grenarp Co to redeem the loan notes at a 5% premium to market price at any time prior to their redemption date.The price/earnings ratio of Grenarp Co is not expected to be affected by the redemption of the loan notes. The earnings per share of Grenarp Co is currently $0·42 per share and total earnings are $8,400,000 per year. Thecompany pays corporation tax of 30% per year. Required:(a)Evaluate the effect on the wealth of the shareholders of Grenarp Co of using the net rights issue funds to redeem the loan notes. (8 marks)

答案： Rights issue price = 3·50 x 0·8 = $2·80 per shareGrenarp Co ...

The finance director of Widnor Co has been looking to improve the company’s working capital management. Widnor Co has revenue from credit sales of $26,750,000 per year and although its terms of trade require all creditcustomers to settle outstanding invoices within 40 days, on average customers have been taking longer. Approximately1% of credit sales turn into bad debts which are not recovered. Trade receivables currently stand at $4,458,000 and Widnor Co has a cost of short-term finance of 5% per year. The finance director is considering a proposal from a factoring company, Nokfe Co, which was invited to tender tomanage the sales ledger of Widnor Co on a with-recourse basis. Nokfe Co believes that it can use its expertise toreduce average trade receivables days to 35 days, while cutting bad debts by 70% and reducing administration costsby $50,000 per year. A condition of the factoring agreement is that the company would also advance Widnor Co 80%of the value of invoices raised at an interest rate of 7% per year. Nokfe Co would charge an annual fee of 0·75% ofcredit sales. Assume that there are 360 days in each year. Required:(b)Briefly discuss how the creditworthiness of potential customers can be assessed.(3 marks)

答案： The creditworthiness of potential customers can be assessed ...

Grenarp Co is planning to raise $11,200,000 through a rights issue. The new shares will be offered at a 20%discount to the current share price of Grenarp Co, which is $3·50 per share. The rights issue will be on a 1 for 5basis and issue costs of $280,000 will be paid out of the cash raised. The capital structure of Grenarp Co is asfollows:
The net cash raised by the rights issue will be used to redeem part of the loan note issue. Each loan note has anominal value of $100 and an ex interest market value of $104. A clause in the bond issue contract allows Grenarp Co to redeem the loan notes at a 5% premium to market price at any time prior to their redemption date.The price/earnings ratio of Grenarp Co is not expected to be affected by the redemption of the loan notes. The earnings per share of Grenarp Co is currently $0·42 per share and total earnings are $8,400,000 per year. Thecompany pays corporation tax of 30% per year. Required:(b)Discuss whether Grenarp Co might achieve its optimal capital structure following the rights issue. (7 marks)

答案： The capital structure is considered to be optimal when the w...

Hraxin Co is appraising an investment project which has an expected life of four years and which will not be repeated.The initial investment, payable at the start of the first year of operation, is $5 million. Scrap value of $500,000 is expected to arise at the end of four years. There is some uncertainty about what price can be charged for the units produced by the investment project, as thisis expected to depend on the future state of the economy. The following forecast of selling prices and their probabilitieshas been prepared:
Incremental overheads of $400,000 per year in current price terms will arise as a result of undertaking the investmentproject. A large proportion of these overheads relate to energy costs which are expected to increase sharply in thefuture because of energy supply shortages, so overhead inflation of 10% per year is expected. The initial investment will attract tax-allowable depreciation on a straight-line basis over the four-year project life. Therate of corporation tax is 30% and tax liabilities are paid in the year in which they arise. Hraxin Co has traditionallyused a nominal after-tax discount rate of 11% per year for investment appraisal. Required:(a)Calculate the expected net present value of the investment project and comment on its financial acceptability.(9 marks)

答案： Calculation of expected net present value
The investmen...

Hraxin Co is appraising an investment project which has an expected life of four years and which will not be repeated.The initial investment, payable at the start of the first year of operation, is $5 million. Scrap value of $500,000 is expected to arise at the end of four years. There is some uncertainty about what price can be charged for the units produced by the investment project, as thisis expected to depend on the future state of the economy. The following forecast of selling prices and their probabilitieshas been prepared:
Incremental overheads of $400,000 per year in current price terms will arise as a result of undertaking the investmentproject. A large proportion of these overheads relate to energy costs which are expected to increase sharply in thefuture because of energy supply shortages, so overhead inflation of 10% per year is expected. The initial investment will attract tax-allowable depreciation on a straight-line basis over the four-year project life. Therate of corporation tax is 30% and tax liabilities are paid in the year in which they arise. Hraxin Co has traditionallyused a nominal after-tax discount rate of 11% per year for investment appraisal. Required:(b)Critically discuss if sensitivity analysis will assist Hraxin Co in assessing the risk of the investment project. (6 marks)

答案： Sensitivity analysis assesses the extent to which the net pr...