Financial Management 1 Assignment (30% of total marks) 1.

This is an individual assignment and no marks will be given to a student in concern if any act of plagiarism (copying the work of others) is detected. 2. The assignment consists of 3 questions. 3. The assignment is to be typed and printed with line spacing of 1.5 and Cambria font with the size of 12 on paper sheets of A4 size if possible. 4. Due date for the assignment is on 9 July 2013. 5. In total, the assignment shall not exceed 10 A4 pages. Any excess of 10 pages will not be graded.

1. Amy Ltd. has the opportunity to invest in two project with the following estimated future cash flows: Year 1 2 3 4 5 Project A 2,400,000 3,000,000 4,000,000 3,200,000 1,800,000 Project B 3,000,000 4,000,000 2,500,000 2,000,000 1,200,000

The project costs $8m and $9m respectively, and the companys cost of capital is 14%. Required: Assuming that each project has zero residual value and taxation is ignored, determine: a) NPVs of the projects; b) The projects internal rates of return (just state the equation); c) Payback periods of the projects; d) Discounted payback periods of the project; After doing all these calculations, which of the two projects would you choose? Which method(s) would you implement to make your decision and why? Solution:

a. NPV : NPV
t 1

NPV =

1 WACC

ACF1

Initial Outlay

2. Valour Ltd. receives a project offer that has the following characteristics: The project requires an initial investment of $9m; Working capital of $800,000 is also required. This amount is recoverable at the end of the project life; The project takes 6 years to complete; It is expected that the annual revenues and expenses of the project would amount to $7m and $4.5m respectively;

Straight line method is implemented for depreciation; Salvage value is estimated to be $500,000; Corporate tax rate of 30% is applied and; Valours cost of capital is 10%.

Required: Using the abovementioned information, calculate the NPV of the project and suggest whether Valour Ltd should take this project. 3. Valuation of a company can be done using several methods, one of which is dividend growth model. Ohio Ltd, a retail business selling consumer goods, is traded in the stock exchange and the following information is available for Ohio Ltd: Cost of Equity Current years earnings per share Retention Ratio Expected annual growth rate of dividends (first 3 years) Expected annual growth rate of dividends (after 3 years) Required: a) Using dividend growth model, calculate the expected current share price of Ohio Ltd. b) If Ohio is experiencing a boom in the industry trend and changes its terminal growth rate of 6% to 10% due to this fact, calculate the new expected current share price of Ohio. c) Do you think that the decision to update the terminal growth rate to 10% due to industry trend is appropriate and accurate? State your opinions and explain briefly. 18% $0.50 80% 20% 6%

Ohio Ltd is expected to grow indefinitely at 6% per annum after 3 years.