PART A
Laxmi Silwal inherited a property from her grandparents few decades ago and since then the value of the property has been gradually increasing. She in planning to sell the property so she can buy a new house by the bay area. She is considering several offers for the property and several saving plans.
(i) The first offer is a single lump sum amount of $600,000 to be received on 1st January 2017. Laxmi will deposit the amount in a savings account in Commonwealth bank earning 4.25% per annum. If she accepts this offer, how much money will she have in her account at the end of 2020? (Round your answer to whole number)
(ii) The second offer is a single lump sum amount of $600,000 to be received on 1st January 2017. Laxmi will deposit the amount in a savings account in Commonwealth bank earning 4% per annum, compounding half yearly. If she accepts this offer, how much money will she have in her account at the end of 2020? (Round your answer to whole number)
(iii) The third offer is a series of four annual payments on 1st January 2017, 2018, 2019 and 2020 of $350,000, $120,000, $100,000 and $50,000. Laxmi will deposit all payments received in a savings account in Commonwealth bank earning 4% per annum. If she accepts this offer how much will she have saved at the end of 2020?
(iv) The fourth offer is a series of four equal annual payments of $140,000 on 1st January 2017, 2018, 2019 and 2020. Laxmi will deposit all payments received in a savings account in Commonwealth bank earning 4% per annum. If she accepts this offer how much will she have saved at the end of 2020? (Round your answer to whole number)
(v) If Laxmi accepts the second offer for 4 years, what is the effective annual rate of return? (Round your answer to two decimal places)
(vi) Which option will Laxmi choose, and why?
PART B
GetItPacked is in food packaging business and it is considering purchasing a new machine. The company has to pay $590,000 for the machine and an extra $60,000 to install it. A working capital of $70,000 is also required. The machine has a useful life of 5 years and it can be sold for $65,000 at the end of the fifth year. The company will apply the straight-line method to depreciate the machine over the course of its useful life. As the machine is in operation, it is expected to generate additional revenues of $350,000 per annum and reduce the annual operating expenses by $40,000. The working capital is reimbursed at the end of the fifth year.
The company's cost of capital is 10% and tax rate is 30%. (Where decimals, round your answers to two decimal places)
(i) Calculate the initial investment that the company has to make.
(ii) Calculate the after-tax operating cash flow in Year 1. (Hint: Bear in mind you are being asked to calculate operating cash flow which is a step after you have calculated the earnings of the company)
(iii) Calculate the after-tax operating cash flow in Year 5. (Hint: Need to consider the Net working capital which is assumed to be added back to the operating cash flow at the end of project's life and consider the salvage value after tax.)
(iv) Calculate the net present value (NPV) of the investment.
(v) Calculate the payback period of the investment.
PART C
Use the following information about Red Rock Corporation Ltd.'s capital structure to answer the questions below;
Red Rock's capital structure is made up of;
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EQUITY
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DEBT
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Preference Shares
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Ordinary Shares
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Bonds
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EQUITY DEBT
Preference Shares Ordinary Shares Bonds
- Red Rock has issued 4 million preference shares, which pay annual dividend per share of $0.30. They are currently trading at $2.50 each.
- Red Rock has issued 6 million ordinary shares, which are currently trading at $11.25 each. Shareholders are expected to receive a dividend of $1.60 per share next year, and this dividend is estimated to grow at a constant rate of 4% in perpetuity.
- Red Rock has 100,000 bonds outstanding with a face value of $100 each. These bonds have 7 years to maturity and pay an annual coupon of 7%. The current yield on the bonds is 8%. Red Rock's statutory corporate tax rate is 30%.
When answers in decimals, round them to two decimal places.
(i) What is the market value of Red Rock's preference shares?
(ii) What is Red Rock's cost of preference shares?
(iii) What is the market value of Red Rock's ordinary shares?
(iv) What is Red Rock's cost of ordinary shares?
(v) What is the value of Red Rock's bonds?
(vi) What is Red Rock's after-tax cost of debt?
(vii) What is Red Rock's WACC (Weighted Average Cost of Capital)?