Questions on Financial Management

... Management Development Institute of Singapore Questions on Financial Management UNIVERSITY OF WALES MASTER OF BUSINESS ASMINISTRATION MBWD5 0306A SONG YANG G0262693X CHEN HUIHUI G0260998W TU XIAOXIN G0174023M LI XING G0231389N 17/Aug/04 TABLE OF CONTENTS Page QUESTION -----------------------------------------------------------------3 a) i. NPV and IRR ---------------------------------------------------------3 a) ii. Sensitivity Analysis -------------------------------------------------5 b) Merits and Drawbacks of the Use of IRR ------------------------7 QUESTION 2 --------------------------------------------------------------9 a) i. Dividend model ------------------------------------------------------9 a) ii. Earnings based model---------------------------------------------9 a) iii. Assumptions --------------------------------------------------------10 b) Price earnings ratio---------------------------------------------------10 QUESTION 3-------------------------------------------------------------13 a)i. earning per share---------------------------------------------------13 a)ii. Level of earning at which EPS will be same----------------13 b) Factors that limit the amount of debt----------------------------14 c) Dividend Payment Policies----------------------------------------15 Bibliography -----------------------------------------------------------17 QUESTION 1: Capital Expenditure Decisions and Investment Criteria a) i. NPV and IRR The worksheet for Cash Flows of the Pentre plc ('000) Year0 Year1 Year2 Year3 Year4 Year5 Investments: 1. Production line 2. Ad & Marketing 3. Working Capital (20% of sale) 4. Change in net WC (8000) (2000) 0 (360) 360 (72) 432 0 432 0 432 0 432 432 Total cash flow of investment (1,2,3,5) (10360) (72) 0 0 0 432 Income: 5. Sales revenues 6. Total cost 7. Opportunity cost 8. Depreciation 9. Residual value 10. Income bf taxes 11. Tax (35%) 12. Net Income 0 6000 (2600) (25) (1500) 1875 (656.25) 1218.75 7200 (2960) (25) (1500) 2715 (950.25) 1764.75 7200 (2960) (25) (1500) 2715 (950.25) 1764.75 7200 (2960) (25) (1500) 2715 (950.25) 1764.75 7200 (2960) (25) (1500) 500 3215 (1125.25) 2089.75 Operating Revenues and Costs ('000) Year Sales Volume Price Sales Revenues Fixed Cost Direct Cost($120) Total Cost 1 2 15 18 400 400 6000 7200 (800) (800) (1800) (2160) (2600) (2960) 3 4 5 18 18 18 400 400 400 7200 7200 7200 (800) (800) (800) (2160) (2160) (2160) (2960) (2960) (2960) Cash Flows

want to read more? →