Financing and Evaluating Investments

DUE DATE: 23:59 on Tuesday, 27 March 2018 WEIGHTING: 20% This assignment requires students to apply relevant knowledge from Modules 2 (Management of Liquidity, Debt, and Equity), Module 3 (Financing and Evaluating Investments), Module 4 (Derivatives) and Module 6 (Currency Risk) to practical situations. REQUIREMENTS: 1. Students are required to complete the assignment individually. 2. Complete ALL questions (see below). 3. All answers must use proper English expression and grammar. 4. You need to provide a detailed, clearly-arranged solution of all questions. Providing merely a number as a result without showing how you have obtained this result will lead to 0 marks for the corresponding question. SUBMISSION: 1. The assignment MUST be submitted via Learning@Griffith by 23:59 on the due date. Students should submit in the Assessment folder/ Project 1. 2. The assignment must be typed and double-spaced. 3. You MUST submit ONE file in Word format. 4. Please do not forget to complete the electronic assignment cover sheet.1 Problem 1 – Module 2 You have been employed as a consultant of Wazup Ltd, a company which tunes expensive cars. You find out that ? Wazup pays interest (coupons) of $ 125,000 once every year on its bonds with face value of $ 2,500,000. The bonds mature in exactly 10 years. The current market interest rate (yield) on similar bonds is 5.5%. The company’s tax rate is 25%. Risk-free rate is 3.5 %. In total, there are 2,000,000 ordinary shares issued. Current trading price per share is $ 3.34. There are 200,000 non-redeemable preference shares which pay 10% annually (last payment just occurred). The preference shares have an original value (face value) of $ 2 each. Current market price of a preference share is $ 2.73. The market risk premium is 5 %. The company’s beta is 2.1. Based on this information: 1. Calculate the company’s cost of equity. 2. Calculate the cost of preference shares. 3. Calculate the current market value of the company’s debt. 4. Calculate the company’s weighted average cost of capital in a world without taxes. 5. Calculate the company’s after-tax weighted average cost of capital. 6. A manager of Wazup who is not familiar with the Capital Asset Pricing Model would like to know more about the beta factor of 2.1 which you have used for your calculations. Please provide an explanation of the difference between systematic and unsystematic risk. What does it mean that the company’s beta is 2.1? Problem 3  – Module 3 The Kalkbrenner Ltd is considering whether to make an investment in a new machine with initial outlay of $ 100,000, economic life of four years and no salvage value. This machine will generate annual cash inflows of $ 40,000 per year. Assume that this amount represents also the net accounting profit (before depreciation), the machine is depreciated on a straight-line basis and there are no taxes. The Kalkbrenner Ltd uses a minimum benchmark ARR of 15% and a benchmark payback period of 2 years. The company’s cost of capital is 16%. 1. Evaluate the project with the ARR, payback period, NPV and IRR methods of capital budgeting and provide an investment decision according to each of these criteria. Please use the approximation method for calculating the IRR. 2. The Kalkbrenner Ltd has as a second alternative a project with initial outlay of $ 120,000, economic life of 3 years and annual inflows of $ 55,000 per year. Both projects are mutually exclusive. a. What is the NPV of the second project? b. Which project should be chosen based on the constant chain of replacement assumption? Hint: Calculate the equivalent annual annuity (EAA).