Advanced Financial Management - Assignment Example

Question one; DOL =% Change IN EBIT)/%change in sales Sales (180*9000) $ 1,620,000.00 $ 1,782,000.00 Variable cost (95*9000) $ (855,000.00) $ (940,500.00) Fixed cost $ (550,000.00) $ (550,000.00) EBIT $ 215,000.00 $ 291,500.00 % change in Ebit $ 76,500.00 %change in sales $162,000.00 DOL 47% DFL= (% Change in net income/% change in EBIT 10% increase Sales (180*9000) $ 1,620,000.00 $ 1,782,000.00 Variable cost (95*9000) $ (855,000.00) $ (940,500.00) Fixed cost $ (550,000.00) $ (550,000.00) EBIT $ 215,000.00 $ 291,500.00 less; interest (1500,000*0.08* $ (120,000.00) $ (120,000.00) EAT $ 95,000.00 $ 171,500.00 Net of tax 70% $ 0.70 $ 0.70 % change in Ebit 76500 $ 66,500.00 $ 120,050.00 %change in sales 53550 DFL 70% DCL = DFL × DOL DFF= 33% Question 2. Before After Initial Outlay 1,000,000 1,000,000 Current share price $ 10.25 $ 11.25 Shares 97560.9756 88888.88889 Question 3 (in millions of dollars) Actual Forecast 2014 Forecast basis 2015 Sales $1,500.00 Growth 1.1 $1,650.00 COGS $900.00 % of Sales 60.00% $990.00 SGA Expenses $ - % of Sales 35.00% $577.50 EBIT $600.00 $82.50 Less Interest $ - Interest rate x Debt03 $20.00 EBT $600.00 $62.50 Taxes (40%) $240.00 $25.00 Net Income $360.00 $37.50 Dividends $290.00 $15.00 Add. To retained earnings $70.00 $22.50 BALANCE SHEET 2015 2015 (in millions of dollars) Forecast Forecast 2015 Forecast basis Without AFN AFN With AFN Assets 0 Cash $20.00 % of Sales 1.00% $16.50 $16.50 Accounts receivable $240.00 % of Sales 12.00% $198.00 $198.00 Inventories $240.00 % of Sales 12.00% $198.00 $198.00 Total current assets $500.00 $412.50 $412.50 Net plant and equipment $500.00 % of Sales 25.00% $412.50 $412.50 Total assets $1,000.00 $825.00 $825.00 Liabilities and equity Accounts payable & Accruals $100.00 % of Sales 5.00% $82.50 $82.50 Notes payable $100.00 Carry-over $100.00 ($90.00) $10.00 Total current liabilities $200.00 $182.50 $92.50 Long-term bonds $100.00 Carry-over $100.00 ($90.00) $10.00 Total liabilities $300.00 $282.50 $102.50 Common stock $500.00 Carry-over $500.00 $500.00 Retained earnings $200.00 RE02 + DRE03 $222.50 $222.50 Total common equity $700.00 $722.50 $722.50 Total liabilities and equity $1,200.00 $1,187.50 $917.50 Required assets = $825.00 Specified sources of financing = $1,005.00 Additional funds needed (AFN) ($180.00) Debt to equity ratio Current New Debt New Funding at 85% capacity Debt 0.7 0.1 Equity 0.3 0.9 Question four 15% sales growth Sales 1035 Costs -500 Taxable Income 535 Tax -120 Net Profit 415 Assets Current Assets 500 Non-Current Assets 600 1100 Liabilities/Equity Debt 700 Equity 400 1100 Asset to sales 1.1 Debt to equity 1.8 Profit Margin 0.3 Question six Less payment is $19694.3 Payment brief Event Amount Term Period Lease $1,000,000.00 1 Advanced Payment $19,694.20 1 Advanced Payment $19,694.20 1 Lease Payment $19,694.20 58 Monthly Lease Residual $90,000.00 1 Question seven Value of a right= Value of the right = Market value – Average price Average price= {800*3) =$2400 Value of a right= {2400-1920) = {480/800) =$0.6 per share (Q7-Q19) The ex-rights share price Step 1: Calculate market value of ABC PLC prior to the rights issue Market Value prior to rights issue ($3x 10 million shares)=$30 million Step 2: Calculate cash proceeds raised from the rights issue Cash $3,000,000  Step 3: Calculate number of shares after the rights issue Number of Shares (10 million shares+ (3/2.4 million) =1125, 000 shares Step 4: Calculate Theoretical Ex-Rights Price Theoretical Ex-Rights Price= (30 million+3 million) =$33 million/11250, 000=$3per share The value of the investment cum rights and ex-rights Cum right Value of 1 Cum Right = (Stock market price – subscription price) / (Number of rights needed to buy 1 new share +1) Value of cum right= {3-2.4)/2+1}=$0.3 per share Ex right price= {Stock market price – subscription price)/ (Number of rights needed to buy 1 new share) Value of ex. right= {3-2.4)/1}=$0.6 per share Question eight Duration of the Bond Debenture Term to Maturity (Years) Coupon Rate (%) Duration (Yrs) A 3 12 2.75 B 2 10 1.92 C 4 9 3.53 D 5 11 4.21 E 8 13 5.79 F 7 14 5.27 Question nine Maximum subscription price = current share price $ 7.5 Minimum is anything > 0 (b) Number of new shares = (80 million/$6.25) = 12,800,000 shares Number of rights needed 3.64 C. ex-rights price = {stock Price - Rights subscription price per share) / Number of rights required to buy one share} Ex-right price={$7.5-6.25)/12.8 million shares= $7.5 Value of a right = (Stock Price - Rights subscription per share) / # of rights required to buy one share + 1  Value of a right={$7.5-6.25)/3.64}+1)=$6.78 d.) how a shareholder with 100 shares and no desire (or money) to buy additional shares is not harmed by the rights offer (d) Before offer: (100shares*7.5) =7500 After offer: (100shares*7.5 ex right) =7500 Question 10 an amortization schedule Years Interest Payment Principal Payment Balance 1 59,500.00 118,136.03 581,863.97 2 49,458.44 128,177.59 453,686.39 3 38,563.34 139,072.68 314,613.70 4 26,742.16 150,893.86 163,719.84 5 13,916.19 163,719.84 0 6 0 0 0  After the 30th payment the bank advised an increase in the annual interest rate to 8%. B Years Interest Payment Principal Payment Balance 3 25,169.10 96,911.56 217,702.14 4 17,416.17 104,664.49 113,037.65 5 9,043.01 113,037.65 0 6 0 0 0 Question eleven Question twelve Present value of the face value $ 2,488.89 PV of the Annuity $ 3,142.00 Price of the Non-Callable Debenture $ 5,630.89 coupon rate need to be for the debentures to sell at par 1.79 cost of the call provision $ 8,630.89 Question thirteen             Question fourteen Question fifteen Black score pricing model (Vc) is given by; VC=Nd(S)-Nd2 (Ke) ^RT} D2=Log(S/K) + (0.5variacne+Rf)/r.root (t} D2-D1- r.root (t}} VC=Nd (25)-Nd2 (23.5) ^5} = But Nd1=log (25/23.5) + (0.5*0.07+5)/0.26 root 1} = Nd1=log (1.04)+5.28)/0.26}=log24.3=1.386 Nd2=1.386-0.26} =1.126 VC= {1.126(25) +1.38(23.5) =$60.58 Question sixteen Call Option Profit/Loss = {Stock Price at Expiration - Breakeven Point} Breakeven Stock Price = {Call Option Strike Price + Premium Paid} Breakeven Stock Price = {9+0.5) =$9.5 Call Option Profit = {10.5-9.5) =$1 Put Option Breakeven Stock Price= {19.75-0.70) =$19.05 Put Option loss= {9-19.05) =-10.05 Question seventeen Calculate the cost of switching using both the One Shot Approach and the Accounts Receivable Approach One Shot Approach net cash flow 58000 New Policy 63800 Amount to be received 134200 Present value $ 130,608 Net Benefit $ 66,808 It is evident that the net benefit (66808) is greater than the net cash of 63800 under the new policy. The cost of switching shall therefore be NPV= {66808-63800} =$3008 Question eighteen The gain from the merger 250,000/0.1=$2700, 000 The net cost of the cash offer? Acquiring: value = 4,500,000 Target: value = 5900,000 Gain from merger = (5900000-4500000) =$1400, 000 The net cost of the share alternative (4.5+9+25)*50% shareholding= $26 million The NPV of the acquisition under the cash offer shall be the (Gain-cost) = (25 000,000-1400, 000) =$23.6 million The share offer = (25 000,000-23.6million) =$1.4 million Question Nineteen Cash flow 1,370,000 1.4980 2052260 Cost Upgrade -500,000 New Asset -1,350,000 Gain from takeover 202,260 Maximum price to be paid Upgrade 500,000 New Asset 1,350,000 Shares (5million @$2 per share 10,000,000 Purchase cost $11,850,000.00 B Accounts Receivable Approach. monthly benefit from extending credit $ 5,800.00 Carrying cost $ 2,205.50 Since the monthly benefit is $5800 and the monthly cost is $2205.5, the net benefit shall be the difference which is $3594.5 the PV of the switch will be ($3594.5/2.75%}=$130,709.09 Read More