Finance Answers

In January 2021, Tesla Inc shares were priced at $860. The value of the company at

that stock price was $810 billion. The reported price earnings ratio TTM (Trailing

Twelve Month) ratio in the Financial Times at that date was 1,693. At the same date,

Volkswagen (VW) was worth €89 billion and had P/E (TTM) of 18.

In January 2021, 15 of the 25 investment analysts following Tesla had buy or hold

ratings on the stock and 10 had sell.

In finance terms, how can you justify Tesla’s stock price? It is a growth stock, but

how can you pay that price for growth?

In January 2021, Tesla Inc shares were priced at $860. The value of the company at

that stock price was $810 billion. The reported price earnings ratio TTM (Trailing

Twelve Month) ratio in the Financial Times at that date was 1,693. At the same date,

Volkswagen (VW) was worth €89 billion and had P/E (TTM) of 18.

In January 2021, 15 of the 25 investment analysts following Tesla had buy or hold

ratings on the stock and 10 had sell.

In finance terms, how can you justify Tesla’s stock price? It is a growth stock, but

how can you pay that price for growth?

Lexus Berhad is considering two mutually exclusive projects, A and B. Project A costs RM95,000 and is expected to generate RM65,000 in year one and RM75,000 in year two.  Project B costs RM120,000 and is expected to generate RM64,000 in year one, RM67,000 in year two,RM56,000 in year three, and RM45,000 in year four. The firm's required rate of return and reinvestment rate for these projects is 7.25%.  

1. The PV of cash flow for Project A in year 1 is 
2. The PV of cash flow for Project A in year 2 is
3. Total PV of project A's cash flows is 
4. The Discounted Payback Period for project A is _________ years
5. The NPV of project A is
6. The IRR of project A is __%. 
7. The value of project A's cash flow reinvestment in year 1 is __________.
8. The value of project A's cash flow reinvestment in year 2 is __________.
9. The MIRR of project A is ______%.

Tinsel Tin Company, an Australian company, mines tin using cheap, resource-wasteful techniques in a tropical country. The effects of the mining include pollution of freshwater streams from almost their sources to the sea. The local people used to fish, hunt near, get drinking water from and swim in these streams, but now none of these things are possible. Local people now buy canned meat for protein. It is relatively cheap and tends to be very poor quality with a very high fat content. As a result, the local people are much fatter than they used to be and their health is poorer. Tinsel has supplied a fully equipped medical clinic but expects the local people to supply the staff. Discuss each of the following questions. (a) Has Tinsel contravened, in your view, its ethical responsibilities? (b) Is it possible to trade off an ethical ‘bad’ with an ethical ‘good’? (c) Has Tinsel done enough to compensate for the change they have brought about in the local people’s lives?

The incorporation of ethics into business practices has been characterised as ‘doing well by doing good’. (a) Why would firms want to ‘do good’? (b) Give some examples of ‘doing good’ by employees, the general community and the natural environment.

On what bases could you argue the collapse of HIH was an example of the principal-agent problem?

Dan Levy is in partnership with three others in their business, Outdoor Camping World. (Outdoor World had been Dan’s business and Camping World had been run by the other three until they merged the businesses last year. They merged the names too, so they might keep all their old customers, even though it doesn’t make much sense.) Dan argues that the firm should maximise gross profit margins [(selling price – buying price)/ selling price] on each item of stock. (a) Do you think this is a valid financial objective? (b) Is this objective consistent with maximisation of partners’ wealth? (c) What problems do you see in operationalising this objective?

Dan Levy is in partnership with three others in their business, Outdoor Camping World. (Outdoor World had been Dan’s business and Camping World had been run by the other three until they merged the businesses last year. They merged the names too, so they might keep all their old customers, even though it doesn’t make much sense.) Dan argues that the firm should maximise gross profit margins [(selling price – buying price)/ selling price] on each item of stock. (a) Do you think this is a valid financial objective? (b) Is this objective consistent with maximisation of partners’ wealth? (c) What problems do you see in operationalising this objective?

Toowoomba Computer Works (TCW) has employed a programmer towrite business programs for their clients. She writes a program which will be ideal to use to teach first-year accounting students the rudiments of electronic financial record-keeping. It sells for $200 per copy. TCW decides to give 100 copies free to the local university to be distributed to students in whatever way the course lecturer decides. The firm also gives the university a free site licence. Chapter One: Introducing the firm and its goals (a) Would this action tend to work against TCW’s avowed objective of wealth maximisation? (b) Is there an ethical problem here for any of the parties? 

Toowoomba Computer Works (TCW) has employed a programmer towrite business programs for their clients. She writes a program which will be ideal to use to teach first-year accounting students the rudiments of electronic financial record-keeping. It sells for $200 per copy. TCW decides to give 100 copies free to the local university to be distributed to students in whatever way the course lecturer decides. The firm also gives the university a free site licence.