This document provides solutions to finance questions related to P/E ratio, dividend growth model, NPV calculation, IRR calculation, limiting factor, production plan, maximum contribution, and breakeven point.
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Question 1: (i)P/E ratio: TheP/E proportion is mainly considered by allotting a firm's current stock price by its earnings per share (EPS). Stellar Ltd: EPS= 38P Stock price= $100000 (assume) P/e ratio= 100000/38 =26.31 (approx.) (ii)Dividend growth model Intrinsic Value = D1 / (k – g) Intrinsic Value = 2 / (0.1 – 0.04) Intrinsic Value = $33.33 D1=D0∗(1+g)=$2.10 P=2.10/0.08−0.05=$70 A.Three problems in using above techniques. One of the principal drawbacks of the PE ratio is income "efficiency." When discussing how much a good PE ratio is, companyneed guarantees that perhaps the PE ratio earnings per share (EPS) are actually actual earnings. Often earnings may be impaired by rare or one-off profits or losses, or other aspects in valuation like depletion. Accounting could be difficult because that wouldn't indicate that the business is either unethical or dishonest simply because a corporation is using certain accounting metrics that make calculating profits more complicated. It just implies they have to work much harder as just a shareholder or researcher to get the whole picture and better appreciate a certain company's value. The greatest drawback of the PE ratio seems to be the reality that Market value does not really tell users enough about the firm's capacity to develop revenues and profits in the long term. If users take a gander at the PE proportionby themself, users can easily know that a business trading inside an 80-fold versus income is ridiculously overpriced but that an 8-fold company investing is quite affordable.
Thus it is stated that company must use dividend growth model in order to mak4e better and meaningful decision. QUESTION 2 (a) NPV calculation Year012345 Project A 1,50,00 05,6005,6005,6005,6005,600 NPV 1,80,00 06272 4464.28571 4 3985.96938 8 3558.90 1 3177.5 9 Year012345 Project B1,80,0005,6005,6005,6005,6005,600 Cumulative cash flow1,80,0001,85,6001,91,2001,96,8002,02,4002,08,000 1,71,459 TRUENPV positive, accept (b) IRR calculation YearProject A Project B 01,80,000 1,50,00 0 125,00010,000 225,00010,000 325,00060,000 425,00090,000 525,00080,000 Year012345IRR Project A 1,80,00 025,00025,00025,00025,00025,00025000 - 13.888 9 Project B 1,50,00 010,00010,00060,00090,00080,00050000 - 33.333 3 (c)
NPV: This variables increases project performance by calculating project present price. It also has some benefits that make NPV as a mechanism of project assessment such as: This process involves of a time value component that also makes the analysis of investment proposals more efficient and reliable. This can be implemented to any operation type and scale. Within this technique there is no limitation and because of that it's become simpler for customers. IRR: It is described as a procedure used to calculate estimated financial return. This approach has certain characteristics that make it an efficient handle to assessment such as: A.The IRR process is simple to use, as it requires some financial data entered in the formula to quantify implementation success. B.As with this method, there is no need for operating cost that also makes it an excellent way to evaluate the effectiveness of financial initiatives. QUESTION 3 Solution: (a) Limiting factor: The limiting variable is hourly of work. It is because there are 139,000 expected hours of work when there are 100,000 usable hours of work. Although there is, 39000 level deficit in the overall calculation. Working Note: For material DescriptionProduct RProduct SProduct TTotal Direct material453 Maximum sales demand20000250008000 Direct material require8000012500024000229000 Available material229000 Shortage/excess-
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For labour hours DescriptionProduct RProduct SProduct TTotal Direct labour hour233 Maximum sales demand20000250008000 Direct labour hour require400007500024000139000 Available labour hours100000 Shortage39000 For machine hours DescriptionProduct RProduct SProduct TTotal Machine hour per unit432 Maximum sales demand20000250008000 Machine hour require800007500016000171000 Available machine hours200000 Excess29000 (b) Production plan: Production plan for materials: ProductDemandMaterial requireAvailable materialRemaining R2000080000229000- S25000125000149000- T80002400024000-
Production plan for labourhours ProductDemandLabour hour requireAvailable labour hoursRemaining R2000040000100000 S250007500060000 T8000240000 Production plan for machine hours ProductDemandMachine hour requireAvailable machine hoursRemaining R200008000020000029000 S2500075000120000 T80001600045000 (c) Calculation of maximum contribution: Maximum contribution for material: Product RProduct SProduct T Sales9000001500000440000 Less: variable material cost8000012500024000 Contribution7200001375000416000 Maximum contribution for labour: Product RProduct SProduct T
Sales9000001500000440000 Less: variable labour cost400007500024000 Contribution8600001425000416000 Maximum contribution for machine hour: Product RProduct SProduct T Sales9000001500000440000 Less: variable machine hour cost800007500016000 Contribution8200001425000424000 (d) Breakeven point: BEP: Fixed cost / contribution per unit Contribution per unit: selling price-variable cost per unit = 60-(25+21) = 60-46 = 14 BEP: 120000/14 = 8571 Units