1
Assessment Task 2
Semester 2, 2020
BACC3701 Financial
Management
This assignment ca
ies 30 per-cent of the marks in this unit.
Questions 2,3 and 4 (23 marks) of this assignment MUST be completed on an Excel
Spreadsheet.
The following considerations will be applied when evaluating the submission:
1. The use of an Excel (for Windows) worksheet
2. The setting and presentation.
3. Acuracy of calculations and Analysis.
2
Question 1 XXXXXXXXXX07 marks)
a) In Finance, the focus is more on wealth maximization of the shareholder, though profit
maximization is considered as a part of the wealth maximization objective. Discuss.
) Define “the stand-alone principle” applying in evaluating projects and discuss the types
of cashflows in project evolution.
XXXXXXXXXX4+3=7 marks)
Question 2 XXXXXXXXXX11 marks)
Active PLC is a leading investment company in Australia and you the below details relating
to the capital structure of the company.
Information concerning raising new capital
Bonds $1,000 Face value
13% Coupon Rate (Annual Payments)
20 Term (Years)
$25 Discount offered (required) to sell new bonds
$10 Flotation Cost per bond
Preference Shares 11% Required rate to sell new preference shares
$100 Face Value
$3 Flotation cost per share
Ordinary Shares $83.33 Cu
ent Market Price
$4.00 Discount on share price to sell new shares
$5.40 Flotation Cost per bond
$ XXXXXXXXXXProposed Dividend
Dividend History $ XXXXXXXXXX
$ XXXXXXXXXX
$ XXXXXXXXXX
$ XXXXXXXXXX
$ XXXXXXXXXX
Cu
ent Capital Structure
Extract from Balance
Sheet $1,000,000 Long-Term Debt
$800,000 Preference Shares
$2,000,000 Ordinary Shares
Cu
ent Market Values $2,000,000 Long-Term Debt
$750,000 Preference Shares
$4,000,000 Ordinary Shares
Tax Rate
33%
Risk Free Rate 5%
3
a) Calculate the cost associated with each new source of finance. The firm has no
etained earnings available.
) Calculate the WACC given the existing weights
The financial controller does not believe the existing capital structure weights are appropriate
to minimise the firm’s cost of capital in the medium term and believes they should be as follows
Long-term debt 40%
Preference Shares 15%
Ordinary Shares 45%
c) What impact do these new weights have on the WACC?
The firm is considering the following investment opportunity XXXXXXXXXX)
Data is as follows
Initial Outlay $1,600,000
Upgrade $700,000 End of Year 4
Upgrade - 350,000 Increased sales units per annum - (Year 5-8)
Working Capital $45,000 Increase required
Estimated Life 8 Years
Salvage Value $60,000
Depreciation Rate 0.125 For tax purposes
The machine is fully depreciated by the end of its useful life
Other Cash
Expenses $60,000.00 Per annum (Years 1-4)
Other Cash
Expenses $76,000.00 Per annum (Years 5-8)
Production Costs $0.15 Per Unit
Sales price $0.75 Per Unit (Years 1-4)
Sales price $1.02 Per Unit (Years 5-8)
4
Prior sales estimates
Year Sales
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
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XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
d) Calculate the Net Present Value, Internal Rate of Return and Payback Period
The financial controller is considering the use of the Capital Asset Pricing Model as a
su
ogate discount factor. The risk-free rate is 5 per cent.
Year
Stock
Market Share
Index Price
XXXXXXXXXX $15.00
XXXXXXXXXX $25.00
XXXXXXXXXX $33.00
XXXXXXXXXX $40.00
XXXXXXXXXX $45.00
XXXXXXXXXX $55.00
XXXXXXXXXX $62.00
XXXXXXXXXX $68.00
XXXXXXXXXX $74.00
XXXXXXXXXX $80.00
XXXXXXXXXX $83.33
e) Calculate the CAPM
f) Explain why this figure may differ from that calculated above (i.e. Cost of equity
– Ordinary Shares)
5
Question 3 XXXXXXXXXX06 marks)
Previous Years
Sales 1400 Retained Earnings 170
Costs 900 Dividends 180
Tax rate 0.3
Assets Liabilities/Equity
Cu
ent Assets Cu
ent Liabilities
Cash 460 Creditors 600
Debtors 540 Short Term Notes 100
Inventory 600
Non-Cu
ent Assets Non-Cu
ent Liabilities
PP&E 2000 Debentures 900
Total Assets 3600
Owner’s Equity
Retained Profits 1000
Ordinary Shares 1000
3600
Percentage of Sales Approach – Assume all spontaneous variables move as a percentage of
sales.
a) Given an expected increase in sales of 12%, what is the amount of external funding
equired?
) To maintain the cu
ent debt/equity ratio how much debt and how much equity is
equired?
c) Assuming the company is only operating at 95% capacity, how much new funding (if
any) is required?
Question 4 XXXXXXXXXX06 marks)
Previous Years
Sales 1100 Retained Earnings 80
Costs 800 Dividends 130
Tax rate 0.3
Assets Liabilities/Equity
Cu
ent Assets Cu
ent Liabilities
Cash 400 Creditors
Debtors Short Term Notes
Inventory
Non-Cu
ent Assets
Non-Cu
ent
Liabilities
PP&E 600 Debentures 500
Total Assets 1000
6
Owners’ Equity
Retained Profits 500
Ordinary Shares
1000
a) Given an expected increase in sales of 13%, what is the amount of external funding
equired?
) At this growth rate what is the addition to retained earnings?
c) Calculate the Sustainable Growth Rate (SGR)
d) At the SGR what external funding is required?
e) What would be the growth rate at which no external financing would be required?