Excellent's plc have 3 investments to choose. The company prefer to finance these investments by their...
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Excellent's plc have 3 investments to choose. The company prefer to finance these investments by their firm's cash on hand. The company have a budget constraint of £800,000. The investments cannot be divided. The inflation rate is 15% per annum. Below is the discounted cash flow analysis of the firm : Year 1 (£) 190,000 90,000 -80,000 Investment Cost (£) Year 2 Year 3 (£) 220,000 90,000 -50,000 (£) 400,000 -700,000 -210,000 -70,000 Y 90,000 250,000 Z The market portfolio return is 12%. The risk-free rate is 2%. The beta of Excellent ple is 0.5. Assume no taxation. Required: (a) Rank the projects using the NPV and profitability index (PI) methods. Decide which projects should be chosen. (13 marks) (b) Evaluate whether the firm's usage of its cash balance rather than debt to finance its long-term investments is a good financial practice. (5 marks) (c) John who is one of the directors of Excellent plc claimed that there should not be any problems related to the discount rate in the capital budgeting process. Do you agree or disagree with John's claim ? Justify your stance with proper explanations. (3 marks) One day, one of the directors argue that in the future, the firm should not link its financing decisions with its capital expenditures. Evaluate the director's argument to ascertain whether the firm should proceed on this by providing a (4 marks) [Total : 25 marks] (d) relevant example. Excellent's plc have 3 investments to choose. The company prefer to finance these investments by their firm's cash on hand. The company have a budget constraint of £800,000. The investments cannot be divided. The inflation rate is 15% per annum. Below is the discounted cash flow analysis of the firm : Year 1 (£) 190,000 90,000 -80,000 Investment Cost (£) Year 2 Year 3 (£) 220,000 90,000 -50,000 (£) 400,000 -700,000 -210,000 -70,000 Y 90,000 250,000 Z The market portfolio return is 12%. The risk-free rate is 2%. The beta of Excellent ple is 0.5. Assume no taxation. Required: (a) Rank the projects using the NPV and profitability index (PI) methods. Decide which projects should be chosen. (13 marks) (b) Evaluate whether the firm's usage of its cash balance rather than debt to finance its long-term investments is a good financial practice. (5 marks) (c) John who is one of the directors of Excellent plc claimed that there should not be any problems related to the discount rate in the capital budgeting process. Do you agree or disagree with John's claim ? Justify your stance with proper explanations. (3 marks) One day, one of the directors argue that in the future, the firm should not link its financing decisions with its capital expenditures. Evaluate the director's argument to ascertain whether the firm should proceed on this by providing a (4 marks) [Total : 25 marks] (d) relevant example.
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Solution 1 Cost of equity Ke Rf BetaRm Rf Rf Riskfree rate 2 Rm Market portfolio return 12 Beta 05 Ke 2 0512 2 2 0510 2 5 7 For investment X NPV PVInf... View the full answer
Related Book For
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
Posted Date:
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