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FM217 Fundamentals of Finance Assessment Task 3 Answers

FM217 Fundamentals of Finance Assignment Solutions

 

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Task 3 Final Assessments

Q 1 – Valuing common stock (10%)

ABC Ltd’s ordinary shares expected dividend for next 03 years as follows:

Year 1           K 8

Year 2          K 12

Year 3          K 14

The expected value per ordinary share at the end of the 3rd year would be K 35. What is the current value per share at an 11% discount rate?

 

Q2 – Valuing common stock (5%)

If ZT Ltd.’s shares pay K 5 dividend and expected to grow constantly at 4% every year, if the discount rate 12%, what is the current value of the share?

 

Q3 – Valuing common stock & Dividends (10%)

Company Dividend Paid # of ordinary shares Available earning to shareholders Current Share value

/Price

A 25,0000 10,000 500,000 200
B 800,000 25,000 2,000,000 400

 

Using the above information, calculate both companies:

  1. Dividend per share
  2. Dividend payout ration
  3. Dividend yield

 

Q4 – Investment Project Evaluation Techniques & Capital Budgeting (20%)

A firm with an expected return (discount rate) of 10% is considering the following mutually exclusive projects, cash flow details given below:

Year 0 1 2 3 4 5
Project A -800,000 70,000 120,000 250,000 250,000 240,000
Project B -400,000 200,000 100,000 100,000 150,000 90,000

 

Calculate:

  1. Payback period of each project (Considering the above cashflows)
  2. NPV of each project
  3. IRR of each project
  4. Based on the NPV results, which project would you recommend? Explain.

 

Q 5  – What is the major difference between the independent project and the mutually exclusive project? (5%)

 

Q 6 – IBM wants to set up a computer parts factory in the pacific, considering Fiji and PNG as primary locations to finalize. An initial investment in the project will be around 50,000,000$. IBM can enjoy tax holiday for up to 3 years because of the expected number of local employments. (10%)

 

Country profile of PNG & FIJI As follows:

PNG FIJI
Average risk-free rate 6% 7.5%
Risk premium 7.5% 7%
Expected project life span 10 years 12 years

 

  1. If IBM needs an additional 20,000,000$ for PNG investment, list down 03 sources of finance where IBM can raise additional 20Mn
  2. Calculate the risk-adjusted cost of capital for IBM in each country
  3. What will be the initial debt -to -equity ratio and an Equity ratio of IBM if PNG investment is considered?

 

 

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