Posted: February 16th, 2020

# Letta owns 14% of the ordinary share of Datafarm Ltd Assignment

QUESTION 1 (7 marks)

Letta owns 14% of the ordinary share of Datafarm Ltd Assume dividends from Datatarm is the only income Leila has and sne has no savings

In early March. 2020. Datafarm Ltd reported net profits after tax of $1,000,000 for the year. 2019 (1 January to 31 December. 2019). and announced due to the effect of COVIO 19 Gtobal pandemic 1 expects net profits after tax for the current year. 2020. to be 30% lower than last year s fqure The company currently has a dividend payout ratio of 30%. which « w* apply lor the annual drrdend for 2019. payable m Jirfy 2020, but rt wMI reduce the dividend payout ratio to 20% for the dividend for 2020. payable m Jufy. 2021

In July. 2021. Leis wishes to spend $45,000 How much can she consume in July, 2020 if the capital market offers an interest rate of 9% per year?

QUESTION 2 (6 marks)

Charge Car PA a considering a protect to launch charging stations for electnc cars around Austrafca The rubai nvestment is expected to be $100,000,000 and the term of the protect * 6 years The required rate of return from the protect is t4% p a The annual cash flows are outlined in the fortowng table

End of year Cash flow p a ($m)

Year 1 20

Year 2 22

Year 3 25

Year 4 30

Year 5 34

Year 6 37

a Based on Charge Car s required rate of return would you recommend proceedng with this investment? Present all calculations to support your answer (3 marks)

b Would you change your opinion if Charge Car’s required rate of return increased to 16% pa? Present aS cafcuLatxns to support your answer (3 marks)

QUESTION 3 (10 marks)

a Debra wins $200,000 a lottery She takes onty $20,000 n cash and nvests the balance at a rate of •nterest of 10% pa. with mtererst compounded on a monthly basis on the understanding that she wit receive 160 equal monthly payments with the first one to be made n 2 years Find the size of the payments (5 marks)

b An nvestment firm (Firm A) pays 10% nterest per annum, compounded on a quarterly bas«s To remain competitive the investment manager of another firm (Firm B) is willing to match the nterest rate offered by Firm A but interest wil be compounded on a monthly basis What nomnai rale of interest must Firm B offer to its clients? (5 marks)

QUESTION 4 (5 marks)

Evaluating mutually exclusive projects using the IRR and NPV approaches car. be proMemabc

Discuss this statement with examples

QUESTION 5 (10 marks)

It is JUy 2020 and Bmdle Box Company has just pad an annual dividend of $ 1 20 a share The dividend is expected to increase by 20% n July 2021.15% n July 2022.10% m Jiiy 2023 and thereafter by 5% a year forever from July 2024 onwards investors require a 12% per annum return on Company shares

a What would a share in Natural Company be expected to sell for today (July 2020)? (6 marks)

b Draw a timetne showing all the expected cash flows (4 marks)

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Approved by KOI Academic Board for T2 2020

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QUESTION 6 (52 marks)

Sprint Bolt Ltd is a producer of specialised sport shoes The company has been conducting research and development of a new model, where the lower mould can automatically adjust itself to avoid foot injury The model has been tested and the managing board is happy to launch its production if it is financially viable The company has already spent $800,000 for research and development The new model will have a five- year lifetime, after that the company win stop its production The new production faoMies and equipment will cost $22,000,000 which will be depreciated on a straight-line basis to zero book value The company wilt not sell the equipment after the production of new product is finished

The company expects to sell 80.000 pars in the frst year at $300 per par As the new technique can be potentially followed by competitors, every year the sale quantity is expected to decrease by 10% and the sale price will decrease by 8% Variable costs are expected to be 40% of sales While the new model generates a high gross profit rate, the company expects a high level of product returns of 5% on sales

As a fnancial manager of the company, you’re conducting a capital budgeting analysis of the fnanoal viability of the new model

The company tax rate is 30% Company s required payback is 2 years and requrod rate of retixn is 25% Assume that aA cash flows are made at the end of each year

a Calculate the incremental cash flows for each year (Y. to Y» inclusive) (20 marks)

b Calculate the payback period of the project (4 marks)

C Calculate the net present value, that to. the net benefit or net toss in present value terms of the project (6 marks)

d Calculate the present value index of the project (3 marks)

e Calculate the discounted payback period of the project (6 marks)

f Calculate the internal rate of return of the project (8 marks)

g identify and explain what other factors Spnnt Sport should consider Explan 4 the company should accept the project or not (5 marks)

Submission requvements details Students arc required Io complete this Assessment n Groups of 2 or 3 or 4 people All members of the Group should come from the same Tutorial class and students must form the* own group Students may consult and discuss the Assessment topic with others but they must write up their answers themselves Penalties for copying and plagiarism are severe