This is an individual assignment.  CW1 consists of the first 3 questions and CW2 the second 3 questions.  Each is worth 50% of the assessment of AC3409

Date of issue:    Monday 24thFebruary2014

Date work due:    Monday the 5th of May via Turnitin

Typical length:    Approx.3000 words

Date of issue:    Monday 24thFebruary2014

Date work due:    Monday the 5th of May

Length:NO MORE THAN 3000 words plus tables, references and appendices.

The deadline for submission will be 16.00 on the date of submission via TurnItIn.

Assignments MUST be submitted via turn it in via the Blackboard.  NO HARD COPIES OF THE ASSIGNMENT WILL BE ACCEPTED.

The assignment will be marked and return to you within 15 WORKING days.

Question 1:
Financial Strategy and Corporate Objectives

Word Limit <= 500
1.    Define Corporate Strategy

2.    Explain the meaning of Financial Strategy?

3.    Summarise the functions of Strategic Financial Management.

Question 2: Capital Budgeting Under Conditions of Certainty.

Word Limit <= 500
Using mathematics and narrative summarise in your own words:

1. The IRR concept.
2. The IRR accept-reject decision criteria.
3. The computational and conceptual defectsof IRR.
Question 3: Capital Budgeting and the Case for NPV

Word Limit <= 500
To supply a university consortium with e-learning material on DVD over the next three years, the Somerset Haynes Publishing Company (SACPC) needs to calculate a contract price.

Management believe that the contract’s acceptance will enable SACPC to access a new area of profitable investment characterised by future growth. This would also reduce the company’s reliance on hard copy texts for its traditional clientele. For these reasons management are willing to divert resources from existing projects to meet production.

The company will also relax its normal strict terms of sale. The consortium would pay the contract price in two equal instalments; the first up front but the second only when the SACPC contract has run its course. The following information has been prepared relating to the project:

1.    Inventory
At today’s prices, component costs are expected to be £150,000 per annum. The contract’s importance dictates that the requisite stocks will be acquired prior to each year of production. However, sufficient items are currently held in inventory to cover the first year from an aborted project. They originally cost £100,000 but due to their specialised nature, neither the supplier nor competitors will repurchase them. The only alternative is hazardous waste disposal at a cost of £5,000.

2.    Employee Costs
Each year the contract will require 3,000 hours of highly skilled technicians. Current wage rates are £8.00 per hour. Because these skills are in short supply, the company would also lose a profit contribution of £2.00 per hour in Year 1 by diverting personnel from an existing project if the contract is accepted.

3. Overheads
Fixed overheads (excluding depreciation) are estimated to be £50,000 at current prices. Variable
overheads are currently allocated to projects at a rate of £60.00 per hour of skilled labour.

4. Capital Investment
Fixed assets and working capital (net of inventory) for the project will cost £2 million immediately. The realisable value of the former will be negligible. Company policy is to depreciate assets on a reducing balance basis. When the contract is fulfilled £50,000 of working capital will be recouped.

5. Taxation
Because the contract is marginal in size and the contract deadline is imminent, a decision has been taken to ignore the net tax effect upon the company’s revised portfolio of investments if the contract is accepted. However, it is envisaged that the contract itself will attract a £255,000 government grant at the time of
initial capital expenditure.

6. Anticipated Price Level Changes
The rate of inflation is expected to increase at an annual compound rate of 15 per cent. Employee costs and overheads will track this figure but component costs will increase at an annual compound rate of 20 per cent.

Required:
Assuming that SACPC employ a discount rate for new projects based upon an annual cost of capital of 4.5 per cent in real terms:

1. Calculate the Haynes Company’s minimum contract price.

2. Explain your figures.

3. Comment on other factors not reflected in your calculations which might affect the price.

Question 4: To followWord Limit <= 500    The Chow Ming Group (CPG) needs a new productive process, the cost of which is either £4 million or £6 million depending on future demand. The following forecast data is available.

£4m Project A                £6m Project B
Probability    Years    Annual cash
flow (£m)        Probability    Years    Annual cash
flow (£m)
0.4    1-4    1.20        0.30    1-4    2.00
5-10    1.00            5-10    1.40
0.4    1-4    1.20        0.50    1-4    1.60
5-10    0.40            5-10    0.80
0.2    1-10    0.40        0.20    1-10    0.20
?Pi =1.0                ?Pi =1.0
Cost of Capital 10%        Cost of Capital 10%

Required:
1.    Prior to analysing the data set, refer to appropriate DCF tables and summarise the factors necessary for your analysis.

2.    Use the data set and your DCF factors to determine the probabilistic cash flows for both investment opportunities (£4m and £6m).

3.     Analyse all the above information in the form of decision trees.

4.     Comment on the statistical validity of your findings.

Question 5: To followWord Limit <= 500    Because of recession, the share price of Frank plc tumbled from £3.00 to 100 pence throughout 2009 and market capitalisation fell from £30 million to £10 million. EPS and dividend cover also halved, falling from 10 pence to 5 pence and from two to one, respectively. However, with an economic revival and an increased share price, Frank intends to declare a 10 pence dividend per share (covered once) equivalent to a dividend yield of 2.5 per cent.

Required:
1. Calculate the new equilibrium price for Frank’s shares based on its dividend intentions.
2. Calculate the new equilibrium price if Frank retained 50 per cent of its annual earnings
3. Comment on your results with regard to shareholder returns and the managerial cut-off rate.

Question 6: To followWord Limit <= 500    Figures from the Balance Sheet of Maxim plc are as follows ($m).
Ordinary Share Capital  -1,600
Fixed Assets                   -2,800
Reserves                            -800
Net Current Assets            -200
Debentures                        -600

Two proposals have been placed before the Board by the new Finance Director, each requiring an initial investment of $600,000 and the one piece of vacant land that the company has available, so that only one investment can be chosen.

Project I will generate net cash flows of $240,000 per annum for the first three years of its life and
$100,000 per annum for the remaining two. Project II will generate net cash flows of $200,000 per annum during its life, which is also five years. Neither project has any residual value but the first project is regarded as the less risky of the two. There is £$80,000 of internally generated funds available and the remainder will have to be raised through the issue of ordinary shares and loan stock.  However, Maxim wishes to maintain its original capital structure. The current equity yield is 15% but a new issue of ordinary shares at $5 per share will result in net proceeds per share of $4.75. It is also envisaged that 8% bonds can be sold at par. The company has a marginal corporate tax rate of 25%.

Required:
1.    Derive the marginal WACC applicable to each investment.

2.    Determine the NPV of each project with an explanation of which (if either) maximises wealth.

3.    Summarise the conditions that must be satisfied to validate WACC as a cut-off rate for investment.

CW Feedback

Module:  AC3409            Student:

In order to maintain consistency of marking, a sample of work has been:

1.    Internally moderated, and
2.    Copied for External Examiner review. Marks awarded are subject to the external examiner’s ratification

I have been guided in my assessment by the following:

Assessment criteria, with weightings:

Coding

Demonstration of Specialised Knowledge (20%)        E  G S A I

Evidence of wider reading            (20%)            E  G S A I

Referencing and assumptions        (20%)            E  G S A I

Accuracy of calculations            (30%)            E  G S A I

Structure                    (10%)            E  G S A I

Key to the coding notation

E     =     Excellent    (>=70%)
G     =     Good         (>=60%)
A    =    Average     (>=50%)
S     =     Satisfactory     (>=40%)
I     =     Inadequate    (<40%)