Magana is a medium-sized, all equity-financed, unquoted company which specializes in the development and production berbal...

  

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Magana is a medium-sized, all equity-financed, unquoted company which specializes in the development and production berbal concoctions to cure colds and fhi. Its small but ingenious R &D team has recently made a technological breakthrough which has revealed a number of attractive investment opportunities. It has applied for patents to protect its rights in all these areas. However, it lacks the financial resources required to exploit all of these projects, whose required outlays and post-tax NPVs are listed in the table below. Magana's managers consider that delaying any of these projects would seriously undermine their profitability, as competitions bring forward their own new developments All projects are thought to have a similar degree of risk Project ABCDE Required outlay Sh. 1500,000 1200,000 2000,000 800,000 4000,000 (x) (0) (m) NPV Sh. 650,000 500,000 800,000 300,000 1200,000 The NPV's have been calculated using as a discount rate the 18% post-tax rate of return which Magana requires for rusky R & D veshures. The maximum amount available for this type of investment is Sh. 4000,000, corresponding to Magana's present cash balances, built up over several year's profitable trading Projects A and C are mutually exclusive and no project can be sub-divided. Any unused capital will either remain invested in short-term deposits or used to purchase marketable securities, both of which offer a return well below 18% post-xx Required: (0) Advise Magana, uning satable supporting calculations, which combination of projects should be undertaken in the best interests of shareholders and (x) Suggest what further information might be obtained to assist a faller analysis (10marks) (b) Assume all things are beld constant other than the item in question, for each of the companies below (0 A company with a large proportion of insider ownership all of whom are high income individuals A growth company with an abondance of good vestment opportunities A company experiencing ordinary growth that has high liquidity and much used borrowing capacity A dividend paying company that experiences an unexpected drop in earnings from a tind A company with volatile earnings and high business rik (1) Required: Explain whether or sot you would expect each company to have a medium high or a low dividend (5 marks) pay ratio and the seasons for soch categoriation QUESTION TWO account when determining the optimal cycle? Magana is a medium-sized, all equity-financed, unquoted company which specializes in the development and production herbal concoctions to cure colds and flu. Its small but ingenious R & D team has recently made a technological breakthrough which has revealed a number of attractive investment opportunities. It has applied for patents to protect its rights in all these areas. However, it lacks the financial resources required to exploit all of these projects, whose required outlays and post-tax NPV's are listed in the table below. Magana's managers consider that delaying any of these projects would seriously undermine their profitability, as competitions bring forward their own new developments. All projects are thought to have a similar degree of risk. Project Required outlay Sh. other factors should the company take into (5 marks) 1.500.000 NPV Sh. 650 000 Project ABCDE Required: (1) (11) Required outlay Sh. 1500,000 1200,000 2000,000 800,000 4000,000 (UI) (iv) (1) Required: NPV The NPVS have been calculated using as a discount rate the 18% post-tax rate of return which Magana requires for risky R & D ventures. The maximum amount available for this type of investment is Sh 4000,000, corresponding to Magana's present cash balances, built up over several year's profitable trading Projects A and C are mutually exclusive and no project can be sub-divided. Any unused capital will either remain invested in short-term deposits or used to purchase marketable securities, both of which offer a return well below 18% post-tax Sh. QUESTION TWO 650.000 500,000 800,000 300,000 1200,000 Advise Magana, using suitable supporting calculations, which combination of projects should be undertaken in the best interests of shareholders; and Suggest what further information might be obtained to assist a fuller analysis. (10marks) (b) Assume all things are held constant other than the item in question, for each of the companies below: (1) A company with a large proportion of insider ownership all of whom are high-income individuals A growth company with an abundance of good investment opportunities A company experiencing ordinary growth that has high liquidity and much unused borrowing capacity. A dividend paying company that experiences an unexpected drop in earnings from a trend A company with volatile earnings and high business risk Explain whether or not you would expect each company to have a medium/high or a low dividend payment ratio and the reasons for such categorisi (5 marks) Magana is a medium-sized, all equity-financed, unquoted company which specializes in the development and production berbal concoctions to cure colds and fhi. Its small but ingenious R &D team has recently made a technological breakthrough which has revealed a number of attractive investment opportunities. It has applied for patents to protect its rights in all these areas. However, it lacks the financial resources required to exploit all of these projects, whose required outlays and post-tax NPVs are listed in the table below. Magana's managers consider that delaying any of these projects would seriously undermine their profitability, as competitions bring forward their own new developments All projects are thought to have a similar degree of risk Project ABCDE Required outlay Sh. 1500,000 1200,000 2000,000 800,000 4000,000 (x) (0) (m) NPV Sh. 650,000 500,000 800,000 300,000 1200,000 The NPV's have been calculated using as a discount rate the 18% post-tax rate of return which Magana requires for rusky R & D veshures. The maximum amount available for this type of investment is Sh. 4000,000, corresponding to Magana's present cash balances, built up over several year's profitable trading Projects A and C are mutually exclusive and no project can be sub-divided. Any unused capital will either remain invested in short-term deposits or used to purchase marketable securities, both of which offer a return well below 18% post-xx Required: (0) Advise Magana, uning satable supporting calculations, which combination of projects should be undertaken in the best interests of shareholders and (x) Suggest what further information might be obtained to assist a faller analysis (10marks) (b) Assume all things are beld constant other than the item in question, for each of the companies below (0 A company with a large proportion of insider ownership all of whom are high income individuals A growth company with an abondance of good vestment opportunities A company experiencing ordinary growth that has high liquidity and much used borrowing capacity A dividend paying company that experiences an unexpected drop in earnings from a tind A company with volatile earnings and high business rik (1) Required: Explain whether or sot you would expect each company to have a medium high or a low dividend (5 marks) pay ratio and the seasons for soch categoriation QUESTION TWO account when determining the optimal cycle? Magana is a medium-sized, all equity-financed, unquoted company which specializes in the development and production herbal concoctions to cure colds and flu. Its small but ingenious R & D team has recently made a technological breakthrough which has revealed a number of attractive investment opportunities. It has applied for patents to protect its rights in all these areas. However, it lacks the financial resources required to exploit all of these projects, whose required outlays and post-tax NPV's are listed in the table below. Magana's managers consider that delaying any of these projects would seriously undermine their profitability, as competitions bring forward their own new developments. All projects are thought to have a similar degree of risk. Project Required outlay Sh. other factors should the company take into (5 marks) 1.500.000 NPV Sh. 650 000 Project ABCDE Required: (1) (11) Required outlay Sh. 1500,000 1200,000 2000,000 800,000 4000,000 (UI) (iv) (1) Required: NPV The NPVS have been calculated using as a discount rate the 18% post-tax rate of return which Magana requires for risky R & D ventures. The maximum amount available for this type of investment is Sh 4000,000, corresponding to Magana's present cash balances, built up over several year's profitable trading Projects A and C are mutually exclusive and no project can be sub-divided. Any unused capital will either remain invested in short-term deposits or used to purchase marketable securities, both of which offer a return well below 18% post-tax Sh. QUESTION TWO 650.000 500,000 800,000 300,000 1200,000 Advise Magana, using suitable supporting calculations, which combination of projects should be undertaken in the best interests of shareholders; and Suggest what further information might be obtained to assist a fuller analysis. (10marks) (b) Assume all things are held constant other than the item in question, for each of the companies below: (1) A company with a large proportion of insider ownership all of whom are high-income individuals A growth company with an abundance of good investment opportunities A company experiencing ordinary growth that has high liquidity and much unused borrowing capacity. A dividend paying company that experiences an unexpected drop in earnings from a trend A company with volatile earnings and high business risk Explain whether or not you would expect each company to have a medium/high or a low dividend payment ratio and the reasons for such categorisi (5 marks)

Answer rating: 100% (QA)

Advice for Magana To determine the optimal combination of projects that should be undertaken in the best interests of shareholders we can calculate the total NPVs of different project combinations wit... View the full answer