The equity beta of Fence Co is 0·9 and the company has issued 10 million ordinary shares.

第1题

The following scenario relates to questions11 to 15.The following information relates to a

The following scenario relates to questions 11 to 15.

The following information relates to an investment project which is being evaluated by the directors of Fence Co, a listed company. The initial investment, payable at the start of the first year of operation, is $3·9 million.

The following scenario relates to questions11 to 1

The directors believe that this investment project will increase shareholder wealth if it achieves a return on capital employed greater than 15%. As a matter of policy, the directors require all investment projects to be evaluated using both the payback and return on capital employed methods. Shareholders have recently criticised the directors for using these investment appraisal methods, claiming that Fence Co ought to be using the academically-preferred net present value method.

The directors have a remuneration package which includes a financial reward for achieving an annual return on capital employed greater than 15%. The remuneration package does not include a share option scheme.

What is the payback period of the investment project？

A.2·75 years

B.1·50 years

C.2·65 years

D.1·55 years

Which of the following statements about investment appraisal methods is correct？A.The return on capital employed method considers the time value of money

B.Return on capital employed must be greater than the cost of equity if a project is to be accepted

C.Riskier projects should be evaluated with longer payback periods

D.Payback period ignores the timing of cash flows within the payback period

Which of the following statements about Fence Co is/are correct？

(1) Managerial reward schemes of listed companies should encourage the achievement of stakeholder objectives

(2) Requiring investment projects to be evaluated with return on capital employed is an example of dysfunctional behaviour encouraged by performance-related pay

(3) Fence Co has an agency problem as the directors are not acting to maximise the wealth of shareholders

A.1 and 2 only

B.1 only

C.2 and 3 only

D.1, 2 and 3

Which of the following statements about Fence Co directors’ remuneration package is/are correct？

(1) Directors’ remuneration should be determined by senior executive directors

(2) Introducing a share option scheme would help bring directors’ objectives in line with shareholders’ objectives

(3) Linking financial rewards to a target return on capital employed will encourage short-term profitability and discourage capital investment

A.2 only

B.1 and 3 only

C.2 and 3 only

D.1, 2 and 3

Based on the average investment method, what is the return on capital employed of the investment project？

A.13·3%

B.26·0%

C.52·0%

D.73·5%

请帮忙给出每个问题的正确答案和分析，谢谢！

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第2题

JJG Co is planning to raise $15 million of new finance for a major expansion of existing b

usiness and is considering a rights issue, a placing or an issue of bonds. The corporate objectives of JJG Co, as stated in its Annual Report, are to maximise the wealth of its shareholders and to achieve continuous growth in earnings per share. Recent financial information on JJG Co is as follows:

JJG Co is planning to raise 15 million of new fina

Required:

(a) Evaluate the financial performance of JJG Co, and analyse and discuss the extent to which the company has achieved its stated corporate objectives of:

(i) maximising the wealth of its shareholders;

(ii) achieving continuous growth in earnings per share.

Note: up to 7 marks are available for financial analysis.(12 marks)

(b) If the new finance is raised via a rights issue at $7·50 per share and the major expansion of business has

not yet begun, calculate and comment on the effect of the rights issue on:

(i) the share price of JJG Co;

(ii) the earnings per share of the company; and

(iii) the debt/equity ratio. (6 marks)

(c) Analyse and discuss the relative merits of a rights issue, a placing and an issue of bonds as ways of raising the finance for the expansion. (7 marks)

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第3题

Section B – TWO questions ONLY to be attemptedYou have recently commenced working for Buru

Section B – TWO questions ONLY to be attempted

You have recently commenced working for Burung Co and are reviewing a four-year project which the company is considering for investment. The project is in a business activity which is very different from Burung Co’s current line of business.

The following net present value estimate has been made for the project:

All figures are in $ million

Section B – TWO questions ONLY to be attemptedYou

Net present value is negative $1·65 million, and therefore the recommendation is that the project should not be accepted.

In calculating the net present value of the project, the following notes were made:

(i) Since the real cost of capital is used to discount cash flows, neither the sales revenue nor the direct project costs have been inflated. It is estimated that the inflation rate applicable to sales revenue is 8% per year and to the direct project costs is 4% per year.

(ii) The project will require an initial investment of $38 million. Of this, $16 million relates to plant and machinery, which is expected to be sold for $4 million when the project ceases, after taking any taxation and inflation impact into account.

(iii) Tax allowable depreciation is available on the plant and machinery at 50% in the first year, followed by 25% per year thereafter on a reducing balance basis. A balancing adjustment is available in the year the plant and machinery is sold. Burung Co pays 20% tax on its annual taxable profits. No tax allowable depreciation is available on the remaining investment assets and they will have a nil value at the end of the project.

(iv) Burung Co uses either a nominal cost of capital of 11% or a real cost of capital of 7% to discount all projects, given that the rate of inflation has been stable at 4% for a number of years.

(v) Interest is based on Burung Co’s normal borrowing rate of 150 basis points over the 10-year government yield rate.

(vi) At the beginning of each year, Burung Co will need to provide working capital of 20% of the anticipated sales revenue for the year. Any remaining working capital will be released at the end of the project.

(vii) Working capital and depreciation have not been taken into account in the net present value calculation above, since depreciation is not a cash flow and all the working capital is returned at the end of the project.

It is anticipated that the project will be financed entirely by debt, 60% of which will be obtained from a subsidised loan scheme run by the government, which lends money at a rate of 100 basis points below the 10-year government debt yield rate of 2·5%. Issue costs related to raising the finance are 2% of the gross finance required. The remaining 40% will be funded from Burung Co’s normal borrowing sources. It can be assumed that the debt capacity available to Burung Co is equal to the actual amount of debt finance raised for the project.

Burung Co has identified a company, Lintu Co, which operates in the same line of business as that of the project it is considering. Lintu Co is financed by 40 million shares trading at $3·20 each and $34 million debt trading at $94 per $100. Lintu Co’s equity beta is estimated at 1·5. The current yield on government treasury bills is 2% and it is estimated that the market risk premium is 8%. Lintu Co pays tax at an annual rate of 20%.

Both Burung Co and Lintu Co pay tax in the same year as when profits are earned.

Required:

(a) Calculate the adjusted present value (APV) for the project, correcting any errors made in the net present value estimate above, and conclude whether the project should be accepted or not. Show all relevant calculations. (15 marks)

(b) Comment on the corrections made to the original net present value estimate and explain the APV approach taken in part (a), including any assumptions made. (10 marks)

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第4题

Cement Co is a company specialising in the manufacture of cement, a product used in the bu

ilding industry. The company has found that when weather conditions are good, the demand for cement increases since more building work is able to take place. Last year, the weather was so good, and the demand for cement was so great, that Cement Co was unable to meet demand. Cement Co is now trying to work out the level of cement production for the coming year in order to maximise profits. The company doesn’t want to miss out on the opportunity to earn large profits by running out of cement again. However, it doesn’t want to be left with large quantities of the product unsold at the end of the year, since it deteriorates quickly and then has to be disposed of. The company has received the following estimates about the probable weather conditions and corresponding demand levels for the coming year:

Cement Co is a company specialising in the manufac

Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed of at a cost of $0·50 per bag.

Cement Co has decided to produce at one of the three levels of production to match forecast demand. It now has to decide which level of cement production to select.

Required:

(a) Construct a pay off table to show all the possible profit outcomes. (8 marks)

(b) Decide the level of cement production the company should choose, based on the following decision rules:

(i) Maximin (1 mark)

(ii) Maximax (1 mark)

(iii) Expected value (4 marks)

You must justify your decision under each rule, showing all necessary calculations.

(c) Describe the ‘maximin’ and ‘expected value’ decision rules, explaining when they might be used and the attitudes of the decision makers who might use them. (6 marks)

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第5题

After preparing a draft statement of profit or loss （before interest and tax) for the year

After preparing a draft statement of profit or loss (before interest and tax) for the year ended 31 March 20X6 (before any adjustments which may be required by notes (i) to (iv) below), the summarised trial balance of Triage Co as at 31 March 20X6 is:

After preparing a draft statement of profit or los

The following notes are relevant:

(i) Triage Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is payable annually in arrears on 31 March each year. The loans can be converted to equity shares on the basis of 20 shares for each $100 loan note on 31 March 20X8 or redeemed at par for cash on the same date. An equivalent loan without the conversion rights would have required an interest rate of 8%.

The present value of $1 receivable at the end of each year, based on discount rates of 6% and 8%, are:

After preparing a draft statement of profit or los

(ii) Non-current assets:

The directors decided to revalue the leased property at $66·3m on 1 October 20X5. Triage Co does not make an annual transfer from the revaluation surplus to retained earnings to reflect the realisation of the revaluation gain; however, the revaluation will give rise to a deferred tax liability at the company’s tax rate of 20%.

The leased property is depreciated on a straight-line basis and plant and equipment at 15% per annum using the reducing balance method.

No depreciation has yet been charged on any non-current assets for the year ended 31 March 20X6.

(iii) In September 20X5, the directors of Triage Co discovered a fraud. In total, $700,000 which had been included as receivables in the above trial balance had been stolen by an employee. $450,000 of this related to the year ended 31 March 20X5, the rest to the current year. The directors are hopeful that 50% of the losses can be recovered from the company’s insurers.

(iv) A provision of $2·7m is required for current income tax on the profit of the year to 31 March 20X6. The balance on current tax in the trial balance is the under/over provision of tax for the previous year. In addition to the temporary differences relating to the information in note (ii), at 31 March 20X6, the carrying amounts of Triage Co’s net assets are $12m more than their tax base.

Required:

(a) Prepare a schedule of adjustments required to the draft profit before interest and tax (in the above trial balance) to give the profit or loss of Triage Co for the year ended 31 March 20X6 as a result of the information in notes (i) to (iv) above.

(b) Prepare the statement of financial position of Triage Co as at 31 March 20X6.

(c) The issue of convertible loan notes can potentially dilute the basic earnings per share (EPS). Calculate the diluted earnings per share for Triage Co for the year ended 31 March 20X6 (there is no need to calculate the basic EPS).

Note: A statement of changes in equity and the notes to the statement of financial position are not required.

The following mark allocation is provided as guidance for this question:

(a) 5 marks

(b) 12 marks

(c) 3 marks

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第6题

The chief executive officer （CEO) of Faoilean Co has just returned from a discussion at a

The chief executive officer (CEO) of Faoilean Co has just returned from a discussion at a leading university on the ‘application of options to investment decisions and corporate value’. She wants to understand how some of the ideas which were discussed can be applied to decisions made at Faoilean Co. She is still a little unclear about some of the discussion on options and their application, and wants further clarification on the following:

(i) Faoilean Co is involved in the exploration and extraction of oil and gas. Recently there have been indications that there could be significant deposits of oil and gas just off the shores of Ireland. The government of Ireland has invited companies to submit bids for the rights to commence the initial exploration of the area to assess the likelihood and amount of oil and gas deposits, with further extraction rights to follow. Faoilean Co is considering putting in a bid for the rights. The speaker leading the discussion suggested that using options as an investment assessment tool would be particularly useful to Faoilean Co in this respect.

(ii) The speaker further suggested that options were useful in determining the value of equity and default risk, and suggested that this was why companies facing severe financial distress could still have a positive equity value.

(iii) Towards the end of the discussion, the speaker suggested that changes in the values of options can be measured in terms of a number of risk factors known as the ‘greeks’, such as the ‘vega’. The CEO is unclear why option values are affected by so many different risk factors.

Required:

(a) With regard to (i) above, discuss how Faoilean Co may use the idea of options to help with the investment decision in bidding for the exploration rights, and explain the assumptions made when using the idea of options in making investment decisions. (11 marks)

(b) With regard to (ii) above, discuss how options could be useful in determining the value of equity and default risk, and why companies facing severe financial distress still have positive equity values. (9 marks)

(c) With regard to (iii) above, explain why changes in option values are determined by numerous different risk factors and what ‘vega’ determines. (5 marks)

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第7题

Moonstar Co is a property development company which is planning to undertake a $200 millio

n commercial property development. Moonstar Co has had some difficulties over the last few years, with some developments not generating the expected returns and the company has at times struggled to pay its finance costs. As a result Moonstar Co’s credit rating has been lowered, affecting the terms it can obtain for bank finance. Although Moonstar Co is listed on its local stock exchange, 75% of the share capital is held by members of the family who founded the company. The family members who are shareholders do not wish to subscribe for a rights issue and are unwilling to dilute their control over the company by authorising a new issue of equity shares. Moonstar Co’s board is therefore considering other methods of financing the development, which the directors believe will generate higher returns than other recent investments, as the country where Moonstar Co is based appears to be emerging from recession.

Securitisation proposals

One of the non-executive directors of Moonstar Co has proposed that it should raise funds by means of a securitisation process, transferring the rights to the rental income from the commercial property development to a special purpose vehicle. Her proposals assume that the leases will generate an income of 11% per annum to Moonstar Co over a ten-year period. She proposes that Moonstar Co should use 90% of the value of the investment for a collateralised loan obligation which should be structured as follows:

– 60% of the collateral value to support a tranche of A-rated floating rate loan notes offering investors LIBOR plus 150 basis points

– 15% of the collateral value to support a tranche of B-rated fixed rate loan notes offering investors 12%

– 15% of the collateral value to support a tranche of C-rated fixed rate loan notes offering investors 13%

– 10% of the collateral value to support a tranche as subordinated certificates, with the return being the excess of receipts over payments from the securitisation process

The non-executive director believes that there will be sufficient demand for all tranches of the loan notes from investors. Investors will expect that the income stream from the development to be low risk, as they will expect the property market to improve with the recession coming to an end and enough potential lessees to be attracted by the new development.

The non-executive director predicts that there would be annual costs of $200,000 in administering the loan. She acknowledges that there would be interest rate risks associated with the proposal, and proposes a fixed for variable interest rate swap on the A-rated floating rate notes, exchanging LIBOR for 9·5%.

However the finance director believes that the prediction of the income from the development that the non-executive director has made is over-optimistic. He believes that it is most likely that the total value of the rental income will be 5% lower than the non-executive director has forecast. He believes that there is some risk that the returns could be so low as to jeopardise the income for the C-rated fixed rate loan note holders.

Islamic finance

Moonstar Co’s chief executive has wondered whether Sukuk finance would be a better way of funding the development than the securitisation.

Moonstar Co’s chairman has pointed out that a major bank in the country where Moonstar Co is located has begun to offer a range of Islamic financial products. The chairman has suggested that a Mudaraba contract would be the most appropriate method of providing the funds required for the investment.

Required:

(a) Calculate the amounts in $ which each of the tranches can expect to receive from the securitisation arrangement proposed by the non-executive director and discuss how the variability in rental income affects the returns from the securitisation. (11 marks)

(b) Discuss the benefits and risks for Moonstar Co associated with the securitisation arrangement that the non-executive director has proposed. (6 marks)

(c) (i) Discuss the suitability of Sukuk finance to fund the investment, including an assessment of its appeal to potential investors. (4 marks)

(ii) Discuss whether a Mudaraba contract would be an appropriate method of financing the investment and discuss why the bank may have concerns about providing finance by this method. (4 marks)

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第8题

An analyst has calculated the following ratios for a company:The company’s return on equ

An analyst has calculated the following ratios for a company:

An analyst has calculated the following ratios for