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CORPORATE FINANCE
FN5033
MONDAY / JULY 29, 2013
9.00AM 12.00PM / THREE (3) HOURS
Instructions to candidates:
1.
2.
3.
4.
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7.
This examination paper consists of SIX (6) printed pages including the cover page.
CONFIDENTIAL
CONFIDENTIAL
increase in price equal to the rate of increase in the Producer price Index. It was agreed that the
price and cost estimates above would be appropriate for the first year of production and sales.
In year 2 through 5, however, prices and costs would increase at the expected rate of inflation of
5 percent per annum.
At the close of the meeting, Ms. Smith was assigned the responsibility of completing a capitalbudgeting analysis of the defense contract proposal. Her report is due at the next weekly
meeting of the executive committee.
In addition to the data provided by Mr. Sales, Ms Smith estimates that an immediate investment
in net working capital of $50,000 would be required if the project were accepted. The net
working capital would be recovered at the end of 5 years. From recent analyses of capital
projects, Ms. Smith notes that the companys marginal cost of capital is 12 percent. Since the
risk of the new product line is equivalent to that of the company generally, no additional risk
adjustment to the cost of capital is necessary; WCTs marginal income tax rate is 34 percent.
a.
b.
Calculate the expected operating cash flows over the 5-year life of the project. Adjust the
sales revenue and costs for expected inflation in year 2 through 5.
(10 marks)
c.
(5 marks)
(5 marks)
d.
Calculate net present value and internal rate of return for the project.
(5 marks)
(25 marks)
2,000,000
1,000,000
2,000,000
The ordinary and preference shares are currently quoted at RM2.25 and RM0.95sen per share
respectively, whilst the debentures are quoted at RM90 per RM100 nominal value. Ordinary
3
CONFIDENTIAL
dividend of RM0.22sen, preference dividend and annual interest for the current year have just
been paid. Ordinary dividend is expected to grow at a constant rate of 10%. The debentures are
due to retire in 10 years. Corporate tax is assumed to be at 40%.
Maju Berhad management believes that its long-term optimal capital structure should be in the
ratio of 50:20:30 for ordinary, preference and debt respectively. If this capital structure ratio can
be achieved without altering the current component costs, calculate Majus long-term weighted
cost of capital.
(20 marks)
QUESTION 3 (15 marks)
A consultant has collected the following information regarding Young Publishing:
Total assets
$3,000 million
Tax rate
40%
$800 million
Debt ratio
0%
Interest expense
$0 million
WACC
10%
Net income
$480 million
M/B ratio
1.00
Share price
$32.00
EPS = DPS
$3.20
The company has no growth opportunities (g = 0), so the company pays out all of its earnings
as dividends (EPS = DPS). The consultant believes that if the company moves to a capital
structure financed with 20 percent debt and 80 percent equity (based on market values) that the
cost of equity will increase to 11 percent and that the pre-tax cost of debt will be 10 percent. If
the company makes this change, what would be the total market value of the firm? (The
answers are in millions.)
CONFIDENTIAL
$ 3,800
2075
750
975
140
835
281
$ 554
Dividends
$ 138.50
Addition to retained earnings $ 415.50
Hanan Inc.
2007 Balance Sheet (in million)
Cash
Account rec.
Inventory
Net fixed assets
Total assets
$ 80
750
420
4600
5850
Accounts payable
Long-term debt
Common stock
Retained earnings
Total liabilities & equity
1000
1150
2250
1450
5850
Assume that all costs and assets of Hanan Inc. increase directly with sales. Also assume that
the tax rate and the dividend payout ratio are constant. The firm is currently operating at full
capacity. What is the external financing needed if sales increase by 8 percent?
CONFIDENTIAL
Credit Sales
Credit Purchases
Cash
disbursements:
Wages, taxes, and
expenses
Interest
Equipment
purchases
April
$ 160,000
68,000
May
$ 140,000
64,000
June
$ 192,000
80,000
8,000
7,000
8,400
3,000
3,000
3,000
50,000
4,000
The company predicts that 10 percent of its sales will be never collected; 50 percent of it sales
will be collected in the month of the sale; and the rest of it sales will be collected in the following
month. Purchases on trade accounts will be paid in the month following the purchase. In March
2006 the sales were $180,000. You are required to prepare cash budget for the second quarter
2006.
***End of Question***