Module Title: Advanced Financial Management 2

Transcription

1 CORK INSTITUTE OF TECHNOLOGY INSTITIÚID TEICNEOLAÍOCHTA CHORCAÍ Semester 2 Examinations 2009/10 Module Title: Advanced Financial Management 2 Module Code: FINA 8008 School: Business Programme Title: Bachelor of Business (Honours) in Accounting Award Programme Code: BACCT_8_Y4 External Examiner(s): Internal Examiner(s): Mr. Eoin Langan Mr. C. Barry-Murphy Instructions: Answer Question 1 and one of Question 2 and Question 3 All questions carry equal marks. Duration: 2 Hours Sitting: Summer 2010 Requirements for this examination: Note to Candidates: Please check the Programme Title and the Module Title to ensure that you have received the correct examination paper. If in doubt please contact an Invigilator. Page 1 of 6

2 QUESTION 1 Beno Ltd s managerial finance team has come up with the following cash flow estimates for 8 potential capital investment projects: Project Net present value of other cash flows from the project (i.e. excluding project cost) Project Cost (Time 0) A 50,000 65,000 B 200, ,500 C 100, ,500 D 250, ,000 E 250, ,000 F 50,000 60,000 G 100, ,000 H 300, ,000 Unfortunately funds available for investment are restricted to Requirement You are the finance manager in the company. Based on the above information, you are required to advise the board of directors as to which project/s to invest in. a) Assuming the projects are divisible, which selection of projects would you recommend the company invests in? What is the expected total NPV from your selection? (6 Marks) b) Assuming the projects are non-divisible and project B, D, E and G are mutually exclusive which selection of projects would you recommend the company invests in? What is the expected total NPV from your selection? (Show all your workings so management can clearly see why some combinations have been selected over others). (7 Marks) c) Explain the term capital rationing including the two different types of capital rationing. (d) What other factors should be considered before embarking on a programme of major capital expenditure? (4 Marks) TOTAL 20 Marks Page 2 of 6

3 QUESTION 2 Semplice Ltd manufactures catering equipment for restaurants and hotels. The statement of financial position of the company as at 30 April 2009 is as follows. ASSETS / m Non-current assets at cost less depreciation 57.6 Current assets Inventories 22.5 Trade receivables 27.6 Cash at bank Total assets 109 EQUITY AND LIABILITIES Equity capital and reserves Equity shares of 25c/p each 15 Retained profit Non-current Liabilities Long-term loan 12% 20.0 Current liabilities Trade Payables 22.6 Taxation Total liabilities 47.8 Total equity and liabilities 109 Summarised income statement for year ended 31 April 2009 / m Revenue Profit before interest and tax 23.2 Interest payable (2.4) 20.8 Taxation (5.2) Profit after tax 15.6 Page 3 of 6

4 QUESTION 2 (cont d) Additional information A dividend of / 6 million was paid in the year. The board of directors of Semplice Ltd has decided to invest / 320 million in new machinery and equipment to meet an expected increase in sales for the company s products. The expansion in production facilities is expected to result in an increase of / 6m in annual profit before interest and tax. To finance the proposed investment, the board of directors is considering either: (i) A rights issue of eight million ordinary shares at a premium of / 2.25 per share, OR (ii) The issue of / 20m 10% debentures at par. The directors wish to increase the dividend per share by 10% in the forthcoming year irrespective of the financing method chosen. Assume a tax rate of 25%. Requirement a) For each of the financing methods: (i) Prepare a projected income statement for the year ended 30 April In addition outline the dividend payment and retentions. (5 Marks) (ii) Determine the projected capital structure as at 30 April (iii)calculate the projected earnings per share for the year ended 30 April (iv) Calculate the projected level of financial gearing as at 30 April (2 Marks) (v) Analyse the results (in point form) from an investor s viewpoint. (2 Marks) b) Write a note on each of the following: (i) Capital Asset Pricing Model (ii) Portfolio Theory (5 Marks) TOTAL: 20 Marks Page 4 of 6

5 QUESTION 3 SK Consortium is an international PR and marketing agency. Its shares are listed on an international stock exchange. The company is based in London, but has offices throughout Europe, the Far East and India. Many members of staff are recruited locally. They are supplemented by members of staff based in corporate headquarters in London, but who work worldwide. SK Consortium generally invoices in the customers currency. For many years it followed a policy of not hedging currency risks, and has generally profited from this. The Finance Director, who was widely credited with successfully managing the treasury function has retired. However, the no hedging policy was not without its critics among major investors and financial analysts. The SK Consortium Board is now concerned about currency volatility and the potential effect on its market value and wishes to evaluate different hedging mechanisms. The recently appointed new Finance Director has suggested using either currency futures or forward contracts. She proposes to demonstrate to the directors how futures and forwards contracts would have worked if a forthcoming transaction had been hedged. The details are as follows: Receipt of US$875,000 is due on 1 June The company has known since the end of February 2008 that this receipt is to be expected. Market information at 1 March 2008 Exchange Rates US$/ US$ Futures, US$/ * Spot March One month forward June Three months forward Contract size 62,500 (value of each tick $6.25) Requirements (a) Despite its success, the no-hedging policy was criticised. Discuss the basis for such criticism among investors and analysts and explain why and to what extent this policy, if continued might affect the market value of the company s shares (5 Marks) (b) (ii) Assume it is now 1 June The spot rate US$/ is and the June 2008 currency futures rate is Calculate the net receipts in sterling that would have been expected on 1 March and today (1 June) under the two alternative hedging methods and comment on which would have been the most financially advantageous. (i) Discuss the main features of these two hedging instruments and comment on their suitability for a company such as SK Consortium (8 Marks) (c) Explain the significance, for foreign exchange purposes, of when a currency is trading at a discount in the forward market versus trading at a premium in the forward market against another currency (4 Marks) (d) Describe basis risk and outline its importance in the context of risk management TOTAL: 20 Marks Page 5 of 6

6 Present Value Tables Present value of 1, i.e. (1 + r) -n where r = discount rate n = number of periods until payment Periods Discount rates (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% % 12% 13% 14% 15% 16% 17% 18% 19% 20% % 22% 23% 24% 25% 26% 27% 28% 29% 30% Page 6 of 6