Part A

Question 1
A)
Level of fine Probability Expected present value
500000 0.3 500000 x 0.3
= 150000
1400000 0.5 1400000 x 0.5
= 700000
2000000 0.2 2000000 x 0.2
= 400000
Total: 1250000

B)
Year 0 1 2 3 4
New (1000000)
equipment
cost
Government 250000
grant
Commissio (50000)
n to
Simmons &
Tilton
Production (315000) (330750) (347287.5) (364651.875)
cost
Net Cash (1000000) (115000) (330750) (347287.5) (364651.875)
flow
PVIF 1.0000 0.8929 0.7972 0.7118 0.6355
(12%,n)
PV (1000000) (102683.5) (263673.9) (247199.2425) (231736.2666)
NPV (1845292.909)
No, because the project would cost more than the fine.
C) Toxxikon Co. can try to adjust the product price in order to cover the higher
production cost. Toxxikon Co. may also try to look for alternative project with similar
effect and evaluate both projects. Another factor that Toxxikon Co. may consider is their
relationship with customers and investors. Toxxikon Co. also need to consider the future
investment after the equipment working life ended. One more factor that Toxxikon Co.
can take for consideration is the capabilities of their workforce on handling the new
equipment.

Question 2
A i)
Company Required rate of return
Zico Ltd 0.045 + [2.1 (0.11-0.045) ]
= 0.1815
= 18.15%
Kojun Ltd 0.045 + [1.08 (0.11-0.045) ]
= 0.1152
= 11.52%
Xinal Ltd 0.045 + [0.91 (0.11-0.045) ]
= 0.10415
= 10.415%
Shenang Ltd 0.045 + [1.58 (0.11-0.045) ]
= 0.1477
= 14.77%

ii) Portfolio beta = 1.2995

Company Percentage Beta Outcome
Zico Ltd 20% 2.1 0.2 x 2.1
= 0.42
Kojun Ltd 30% 1.08 0.3 x 1.08
= 0.324
Xinal Ltd 35% 0.91 0.35 x 0.91
= 0.3185
Shenang Ltd 15% 1.58 0.15 x 1.58
= 0.237
Total 1.2995
Portfolios expected rate of return = 12.825%
Company Percentage Expected rate of Outcome
return
Zico Ltd 20% 19.5% 0.2 x 0.195
= 0.039
Kojun Ltd 30% 10% 0.3 x 0.1
= 0.03
Xinal Ltd 35% 10.5% 0.35 x 0.105
= 0.03675
Shenang Ltd 15% 15% 0.15 x 0.15
= 0.0225
Total 0.12825

Portfolio required rate of return = 0.045 + [1.2995 (0.11 0.045)]

= 0.1294675
= 12.9468%

B) Richtoo plcs portfolio is overpriced. In the portfolio, Kojun Ltd is the overpriced
stocks. The remaining company stock is underpriced. To obtain higher return in the
portfolio, Richtoo plc could sell Kojun Ltd and invest it into Zico Ltd as its expected and
required rate of return differs the most. Alternatively, Richtoo plc could find another
company to add into the portfolio as a replacement of Kojun Ltd and keep the
diversification of the portfolio.
Part B

Question 3

A i) Net Income

Worst case scenario ($55000) & 400,000 ordinary shares:

Profit before taxes 55000
Less: Corporate taxes (35%) 19250
Net Income 35750

Worst case scenario ($55000) & 200,000 ordinary shares and $200,000 of 10%
debentures at par:
Profit before interests & taxes 55000
Less: Interest on debentures (10%) 20000
Profit before taxes 35000
Less: Corporate taxes (35%) 12250
Net Income 22750

Worst case scenario ($55000) & 50,000 ordinary shares and $350,000 of 10% debentures
at par:
Profit before interests & taxes 55000
Less: Interest on debentures (10%) 35000
Profit before taxes 20000
Less: Corporate taxes (35%) 7000
Net Income 13000

Expected Average Outcome ($95000) & 400,000 ordinary shares:

Profit before taxes 95000

Less: Corporate taxes (35%) 33250
Net Income 61750
Expected Average Outcome ($95000) & 200,000 ordinary shares and $200,000 of 10%
debentures at par:

Profit before interests & taxes 95000

Less: Interest on debentures (10%) 20000
Profit before taxes 75000
Less: Corporate taxes (35%) 26250
Net Income 48750

Expected Average Outcome ($95000) & 50,000 ordinary shares and $350,000 of 10%
debentures at par:

Profit before interests & taxes 95000

Less: Interest on debentures (10%) 35000
Profit before taxes 60000
Less: Corporate taxes (35%) 21000
Net Income 39000

Best Possible Outcome ($140000) & 400,000 ordinary shares:

Profit before taxes 140000

Less: Corporate taxes (35%) 49000
Net Income 91000

Best Possible Outcome ($140000) & 200,000 ordinary shares and $200,000 of 10%
debentures at par:

Profit before interests & taxes 140000

Less: Interest on debentures (10%) 20000
Profit before taxes 120000
Less: Corporate taxes (35%) 42000
Net Income 78000
Best Possible Outcome ($140000) & 50,000 ordinary shares and $350,000 of 10%
debentures at par:

Profit before interests & taxes 140000

Less: Interest on debentures (10%) 35000
Profit before taxes 105000
Less: Corporate taxes (35%) 36750
Net Income 68250

ii) Earnings per Share

400,000 ordinary 200,000 ordinary 50,000 ordinary

shares shares and shares and
$200,000 of 10% $350,000 of 10%
debentures at par debentures at par
Worst Case 35750 / 400000 22750 / 200000 13000 / 50000
Scenario = 0.0894 = 0.1138 = 0.26
Average Expected 61750 / 400000 48750 / 200000 39000 / 50000
Outcome = 0.1544 = 0.2438 = 0.78
Best Possible 91000 / 400000 78000 / 200000 68250 / 50000
Outcome = 0.2275 = 0.39 = 1.365

B) Proposing 400,000 ordinary shares would result in highest net income but the lowest
EPS spread among the shareholder. Proposing 200,000 ordinary shares and $200,000 of
10% debentures at par would result in lower net income but higher EPS when compare
with offering 400,000 ordinary shares. Proposing 50,000 ordinary shares and $350,000 of
10% debentures at par will result in lowest net income but provide the highest EPS to
shareholder among these three proposal.

Hence, offering 50,000 ordinary shares and $350,000 of 10% debentures at par is the best
proposal as it allow investor to enjoy higher EPS.
Question 4

A) Maximus Ltd

No of share = 20000000 / 0.25

= 80000000

Market value = 80000000 x $1.40

= $112000000

B) EBIT = 25000000

Corporation tax rate = 35%.

Maximus Ltd

Dividend = 25000000 x (1 0.35) / 80000000

= 0.2031

Cost of equity = 0.2031 / 1.4

= 0.1451

= 14.51%

Vu = 25000000 (1-0.35) / 0.1451

= 111991729.8

Minimus Ltd

Vg = 111991729.8 + (25000000 x 0.35)

= 120741729.8

C i) Vg = 111991729.8 + (20000000 x 0.35)

= 118991729.8
ii) Market value of equity = 118991729.8 20000000

= 98991729.8

iii) Dividends available for distribution = 14690000

Profit before interests & taxes 25000000

Less: Interest on debentures (12%) 2400000
Profit before taxes 22600000
Less: Corporate taxes (35%) 7910000 iv) Keg = 0.1451 +
Net Income 14690000
(0.1451 0.12) x
(20000000/98991729.8) x (1-0.35)

= 0.1484

= 14.84%

v) WACC = (98991729.8 / 118991729.8 x 14.84%) + (20000000 / 118991729.8 x 12%)

= 0.1436

= 14.36%