•What is the capital market? How is the primary market different from the secondary market? In your opinion, are these markets efficient? Why?
•What are three primary roles of the U.S. Securities and Exchange Commission (SEC)? How does the SarbanesOxley Act of 2002 augment the SEC’s role in managing financial governance? Do you think businesses became more ethical after SarbanesOxley was passed? Provide examples to support your answer.
•What ratios measure a corporation’s liquidity? What are some problems associated with using such ratios? How would the DuPont analysis overcome these problems?
Week Two Discussion Questions
•How do you define strategic planning? What are some differences between strategic and financial planning? What financial problems might an organization encounter when implementing a strategic plan?
•What information is needed to prepare a cash budget? What is the relationship between an operating and a cash budget? Why is it important for an organization to prepare a cash budget
•What is the breakeven point? What decisions does the breakeven point help an organization make? What actions might an underperforming organization take to reach the breakeven point?
•How do you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How may you use TVM to create your own, or someone else’s, retirement plan?
Week Three Discussion Questions
•How do you define working capital? What may happen if an organization neglected to manage its working capital? What techniques do you recommend for your organization? Why?
•What is capital planning? Why is the internal rate of return important to an organization? Why is net present value important to a project? How do you select from multiple projects presented to your organization?
•What is a lease? Why would you choose to lease instead of buy a capital item? What steps would...
...Netpresentvalue
In finance, the netpresentvalue (NPV) or netpresent worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise longterm projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in presentvalue terms, once financing charges are met.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its presentvalue (PV). Then they are...
...NUMBER: ……….… ROOM: .………………. FAMILY NAME.………….....…………………………. This question paper must be returned. Candidates are not permitted to remove any part of it from the examination room. OTHER NAMES…………….…………………..…….. STUDENT NUMBER………….………..……………..
SESSION 2 EXAMINATIONS NOVEMBER 2012
Unit Code and Name: AFIN252, Applied Financial Analysis and Management Time Allowed: 3 hours plus 10 minutes reading time. Total Number of Questions: 50 Multiple ChoiceQuestions plus 8 full response questions. Instructions: 1. PART A (30 marks): There are 50 multiple choice questions. Answers to these
must be recorded on a redcoloured General Purpose Answer Sheet which will be marked by a computer. Please make sure your name is on this sheet.
2. PART B (60 marks): There are 8 questions. Attempt all questions. Show all
working. Write answers in the spaces provided.
Materials Allowed:
No dictionaries are permitted. A nonprogrammable calculator (no text retrieval capacity) is permitted. Financial calculators may be used. This is a closed book examination. No books, notes or formulae sheets are allowed.
Part B Question Out of Mark
1 6
2 6
3 7
4 11
5 9
6 6
7 6
8 9
Total 60
1(41)
PARTF1.20 A (30 Marks)
There are fifty (50) multiple choice questions, worth 0.6 marks each. Select the most correct answer for each...
...
FINC5001 Capital Market and Corporate Finance

Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying NetPresentValue, what factors do we include, and what factors do we ignore?
Use cash flows not accounting income
Ignore
* sunk costs
* financing costs
Include
* opportunity costs
* side effects
* working capital
* taxation
* inflation
2. Practice Questions
a) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straightline over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?

Figures in 000's  
Year  0  1  2  3  4  5 
Unit Sales   500  600  1,000  1,000  600 
Revenues   2,000  2,400  4,000 ...
...Examples Of NetPresentValue (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
NetPresentValue  Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
Discount Rate  Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected.
Return on Investment – Expected income divided by the amount originally invested
Payback Analysis – The number of years needed to recover the initial cash outlay.
Formulas
NetPresentValue = (t=1..n A * (1+r)t OR (t=1..n A/ (1+r)t
Where A = Cash flow
r = Required rate of return
t = year of cash flow
n = the nth year
Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs
Payback Period = Years taken to repay initial outlay .
Eg. Project Z Outlay = $ 4000
Yearly cash flows = $2000...
...Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project.
Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive NetPresentValue of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values.
This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely sensitive to the sales price of the refrigerator.
Our scenario analysis also exposed a strong probability of the project giving a negative NetPresentValue and giving a probable low Internal Rate of Return of only 4.01%. This is mainly due to the projects sensitivity to the sales price of...
...QUESTION FIVE (6 marks)
Please answer each of the following questions. Each solution should be accompanied by a brief explanation of no more than two (2) typed lines in length.
A) Cynthia is the Chief Financial Officer of Big Corporation (BC). Cynthia’s current objective is to evaluate five new projects with a total capital requirement of $6 million. All of the projects have a positive NPV. The overall capital available for new projects for the next year is $5 million. Which of the following statements about the capital budgeting process that Cynthia should employ is true?
1) Cynthia should rank the projects in increasing order of NPV and choose the highest ranked projects in order until the capital available is exhausted.
2) Cynthia should rank the projects in increasing order of internal rate of return and choose the highest ranked projects in order until the capital available is exhausted.
3) Cynthia should calculate the NPV of various combinations of projects and choose that combination that provides the highest NPV without exceeding the capital available.
4) Cynthia should rank the projects in decreasing order of NPV and choose the highest ranked projects in order until the capital available is exhausted.
Explanation: Calculating combinations of different projects will give Cynthia a better idea in which projects to invest in. NPV also provides proper rule for choosing mutually exclusive projects
B) Which of the following...
...debt to tangible net worth.
5. A measure of profitability and not shortterm liquidity is the
a. Accounts receivable turnover ratio.
b. Sales to working capital ratio.
c. Total asset turnover ratio.
d. Acidtest ratio.
6. Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit. A company’s ROI would be increased if
a. Sales increased by the same peso amount as express and total assets increased.
b. Sales remained the same and expenses were reduced by the same peso amount that total assets increased.
c. Sales decreased by the same peso amount that expenses increased.
d. Sales and expenses increased by the same percentage that total assets increased.
(CMA adapted)
7. When a balance sheet amount is related to an income statement amount in computing a ration;
a. The balance sheet amount should be converted to an average for the year.
b. The income statement amount should be converted to an average for the year.
c. Both amounts should be converted to market value.
d. Comparisons with industry ratios are not meaningful.
(PhilCPA adapted)
8. Ratios are used for many purposes in financial statement analysis. In order to determine the return on investment for a company, the numerator of the fraction used should be
a. Net income.
b. Income before nonrecurring items.
c. Income before nonrecurring items and before income taxes.
d. Income before...
...thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the venture’s presentvalue.
B. Now assume that the Year 6 cash flows are forecasted to be $900,000 in the stepping stone year and are expected to grow at an 8 percent compound annual rate thereafter. Assuming that the investors still want a 40 percent rate of return on their investment, calculate the venture’s presentvalue.
C. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the venture’s presentvalue.
2. Assume the forecasted cash flows presented in Problem 1 for the TecOne Corporation venture also hold for the LowTec venture. However, investors in LowTec have an expected rate of return of 30 percent on their investment until Year 6 when the rate of return is expected to drop to 18 percent. The perpetuity growth rate for cash flows after Year 6 is expected to be 7 percent.
A. Determine the presentvalue for the LowTec venture.
B. If an outside investor offers to invest $1,500,000 dollars today, what percentage ownership in LowTec should be given to the new investor?
3. Ben Toucan, owner of the Aspen BrewPub and Restaurant, wants to determine the...
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