Megabuck Broadcasting plc is prepared to take over Minibuck Broadcasting plc for 2m. The expected cash flows of Minibuck Broadcasting plc are set out below:

Year	Cash flow (m)
20X2	1
20X3	1
20X4	1
20X5	1
20X6	nil
20X7	nil

a. Calculate the present value of these cash flows firstly at a discount rate of 25% pa, and then, secondly, at 20% pa.

b. There are 500,000 shares in Minibuck Broadcasting plc. Estimate how much each share would be worth.

c. Minibuck Broadcasting plc shareholders have been offered one share in Megabuck Broadcasting plc in exchange for one share in Minibuck Broadcasting plc. Each share in Megabuck Broadcasting plc is valued at 528p on the London International Stock Exchange. Giving reasons, state whether you would endorse this deal for a shareholder in Megabuck Broadcasting plc.

HINT

The new flows will be:

Year	Cash flow (m)
20X2	2
20X3	2
20X4	2
20X5	3
20X6	3
20X7	3

Work out the present value of the flows at an appropriate discount rate. Given that there are now 1.5m shares in Megabuck Broadcasting plc, calculate how much each share should be worth.

2. Maelfern Magna District Council needs to replace an old and dangerous bridge. If they replace it with a concrete bridge for 12.0 million, it will carry heavier traffic and attract more tolls. A disadvantage of this proposal is that it will take longer to build and therefore will not attract toll income for two years after construction starts.

An alternative proposal is to build a deeper steel bridge at 8.0 million, which will not attract so much toll income (because it will not be able to carry heavy lorries).

Where a negative number indicates a cash outflow, the expected cash flows of the two proposals are as follows:

	Concrete Bridge	Steel Bridge
Year	million	million
0	-12.0	-8.0
1	nil	1.0
2	3.0	1.0
3	3.0	1.2
4	3.2	1.6
5	3.4	1.6
6	3.4	2.0
7	3.6	2.0
8	4.0	2.0
9	4.0	2.0
10	4.0	2.0

Required:

(a) If market rates of interest are 15% per annum, determine which bridge (based on the cash flows given) the council should build,

(b) Identify other factors that the council would need to take into account in making their decision.