3 You must answer all parts of this question. a.Anne is one of the major bondholders of...
Question:
3
You must answer all parts of this question.
- a.Anne is one of the major bondholders of StrongGrowth Plc, owning 60% of the total bonds issued by the company. She is not happy with how the company's bonds have performed over the last couple of years, and she is planning to make her voice heard during the next round of voting. Do you think she will be able to do so? Justify your answer.
- b.Explain the concept of time value of money.
- c.Pixie has inherited the family business and has decided to sell it. In exchange for her family business, Pixie has been offered an immediate payment (today, Year 0) of 450,000, with further payments of 500,000 at the end of the first year, 500,000 at the end of the second year and 750,000 at the end of the third year. The discount rate (or the opportunity cost for an investment of this type) for Pixie is 5%.
- i.Suppose a second buyer approaches Pixie and offers her 1,965,000 today for the business. Should Pixie accept the second buyer's offer or accept the original offer of 450,000 and the series of payments over three years?
- ii.Briefly discuss what other issues should Pixie consider in deciding whether to accept the first or second offer.
Question 4
You must answer all parts of this question.
GreenFuel Ltd has outgrown its current site due to the demand for electric cars. A decision has already been made that the company wishes to expand in line with demand and has found two sites that would be suitable for their expansion plans, Site A and Site B. At the moment both sites would need a considerable investment to ensure they are able to provide all of the requirements for their customers.
The following table summarises the initial investment required, as well as the net cash inflows for years 1-5.
| Project Net Cash Flows () |
|
Year | Site A | Site B |
0 | (315,000) | (270,000) |
1 | 125,000 | 110,000 |
2 | 98,000 | 100,000 |
3 | 57,000 | 85,000 |
4 | 81,000 | 60,000 |
5 | 98,000 | 74,000 |
The company applies a straight-line method of depreciation, in line with the company's policy over five years. The company's cost of capital is 15%. It is assumed the residual value for Site A will be 80,000 at the end of the 5 years, while for Site B it will be 70,000.
- a.Calculate the net present value (NPV) and internal rate of return (IRR) of the proposed two sites. You are required to show all your workings to support your answers. (Note: Use the interpolation formula to work out the IRR, rather than the Excel's IRR function).
- b.Which site should GreenFuel Ltd invest in? Why?
- c.IRR is a popular investment appraisal technique. Discuss the advantages and disadvantages of this method.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill