Capital Budgeting and NPV Analysis

KOI
Trimester 2, 2017
FIN700–Financial Management
ASSIGNMENT– GROUP
Due date: Submit to your Tutor bythe start of your Tutorial on
Monday, 11 September, 2017 or on Tuesday, 12 September, 2017.
Keep a soft copy in case of misadventure.
Penalties for late lodgment, as per the Subject Outline, will be strictly applied.
This Assignment consists of 4 problems, each involving
calculations, and in some cases recommendations.
You are required to complete this Assignment in Groups of 2 or 3 or 4
people.Groups of 1 or more than 4 persons will incur a penalty of 5 marks out of
30%.
All members of the Group should come from the same Tutorial class. You may
consult and discuss the Assignment topic with others, but you must write up your
answers yourselves. Penalties for copying and plagiarism are severe.
You should follow the following typing conventions:
 Answers to be typed, in the space provided after each question
 If additional pages are required, use the blank pages at the end.
 Times New Roman font (at minimum , 12 pitch), 1.5 line spacing; and
 Left and right margins to be at least 2.5 cm from the edge of thepage.
Research,Referencing and Submission
You should quote any references used at the end of each question.
Use Harvard referencing! Seehttp://en.wikipedia.org/wiki/Harvard_referencing
As this is a calculations problem, there is no need to submit via TURNITIN.
Do not submit this page. Submit page 2 onwards, with KOI Group Assignment Cover Page.
Marking Guide
The Assignment will be scored out of 100%, in line with the rubric in the
Subject Outline.This mark will be converted to a score out of 30%.
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Dr Mervyn Fiedler, Subject Co-ordinator, FIN 700. 11 August, 2017.
______________________________________________________________________
***NOTE:When submitting Assignment, please submit from this page onwards,
with a KOI Group Assignment cover page in front.***
Trimester T217
FIN700
GROUP ASSIGNMENT
Students:Please complete the following before submitting for marking.
Group members
Student No.Student NamePercentage Contribution to AssignmentSignature
1. ............................................................................................................
2. ............................................................................................................
3. ............................................................................................................
4. ............................................................................................................
Tutor: Please circle one name: Dr Mervyn Fiedler; MsRuhina Karim;
Mr Masoud Ahmadi-Pirshahid; Mr NishithPanthi.
Tutorial Day .........................................................and Time ............................
This Assignment consists of four questions. All questions must be answered.
Please answer all questions in the spaces provided after each question.
Two extra pages are included at the end of the Assignment. If more pages are
required, please copy (or extend) page 14.
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QUESTION `1. [6 + 8 = 14 Marks.]
a) This is a two period certainty model problem.
Assume that William Brown has a sole income from Bobcat Ltdin which he owns
12% of the ordinary share capital.
In its financial year 2016-17 just ended, Bobcat Ltd reported net profits after tax
of $600,000, and announced its net profits after tax expectation for the next
financial year, 2017-18, to be 25% higher than this year’s figure. The company
operates with a dividend payout ratio of 70%, which it plans to continue, and will
pay the annual dividend for 2016-17 in mid-August, 2017, and the dividend for
2017-18 in mid-August, 2018.
In mid-August, 2018, Jack wishes to spend $100,000, which will include the cost
of a new car.. How much can he consume in mid-August, 2017 if the capital
market offers an interest rate of 9% per year?
Dividend = Dividend Payout * Net Income
Dividends 2016-17 = 600,000 *70%*12%= 50,400
Dividends 2017-18 = 600,000 *1.25*70%*12%= 63,000
100,000 = 63,000 + X*(1+9%)
X= 33,944.95
Therefore the most he can consume is $16,455.05 (50,400-33,945)
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b) This question relates to the valuation of shares.
Big Ideas Ltd has just paid a dividend of $1.20 a share. Investors require a 12%
per annum return on investments such as Big Ideas. What would a share in Big
Ideas Ltd be expected to sell for today (August, 2017) if the dividend is expected
to increase by 20% in August, 2018, 15% in August, 2019, 10% in August, 2020
and thereafter by 5 per cent a year forever, from August, 2021 onwards?
i= 12%
PV =1.2 + 1.22
(1+i)❑ + 1.22∗(1.15)
(1+ i)2 +. 1.22∗( 1.15 )∗(1.1)
(1+ i)3 + 1.22∗( 1.15 )∗ (1.1 )∗(1.05)
(1+i)4
....
=1.2 + 1.22
(1+i)+ 1.22∗(1.15)
(1+ i)2 +. 1.22∗( 1.15 )∗(1.1)
(1+ i)3 ⌊ 1+ (1.05)
(1+i) + 1.052
(1+i)2 + ..⌋
=1.2 + 1.22
(1+i)+ 1.22∗(1.15)
(1+ i)2 +. 1.22∗( 1.15 )∗(1.1)
(1+ i)3 ⌊ 1+ (1.05)
(1+i) + 1.052
(1+i)2 + ..⌋
=1.2 + 1.22
(1+i)+ 1.22∗(1.15)
(1+ i)2 +. 1.22∗( 1.15 )∗(1.1)
(1+ i)3 ⌊ (1.05)
(12%−5 % ) ⌋
=23.25455
A share would sell for $23.25
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