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Mr. Atiamoh believes that all the two projects have risk characteristics similar to the average risk of the firm and hence NextG’s cost of capital of 10 per cent will apply to them and both investment projects have zero scrap value. The company’s current return on capital employed is 12 per cent (average investment basis) and the company uses straightline depreciation over the life of projects. Year Project (A) Gh₵ Project (B) Gh₵ 0 (110,000) (200,000) 1 45,000 50,000 2 45,000 50,000 3 30,000 50,000 4 30,000 100,000 5 20,000 55000 Required a) Advise NextG’s executive committee which project should be undertaken if: i. the net present value method of investment appraisal is used; ii. the internal rate of return method of investment appraisal is used; b) Critically discuss the reasons for superiority of the net present value method over the other methods. Is the internal rate of return method now redundant? [ 9 marks]
In the pure exchange economy solve for the competitive equilibrium when endowments are as follows:
e11,.e12.e13.......=1,0,0,1,0,0,1,...
e21,e22,e32,...,...=0,1,1,0,1,1,0,...
Assume that when you are 25 years old you plan to aggressively save for your retirement by contributing $5,000 a year to a tax-sheltered account. A relative of yours tells you to forget about earning 10 percent or more a year because that is very unlikely to happen (which is true). He also tells you that you should not worry too much about whether you earn, for example, 6 or 7 percent, because it won't make a lot of difference in your final wealth. You decide to see for yourself the various results that could occur by doing some calculations.
a. Fill in the spreadsheet below with the combinations indicated. Determine the difference in outcomes between 9 percent for 40 years and 10 percent for 40 years.
b. Calculate the difference between earning 6 percent and earning 7 percent for 20, 30, and 40 years. How would you respond to your relative?
5% 6% 7% 8% 9% 10% 20 yrs
25 yrs
30 yrs
35 yrs
40 yrs
Consider a monopolist with the following demand functions for different
market segments
q1= 16 - 0.2P1
q2= 9 - 0.05P2
Where q1 and q2 are the quantities demanded in segments 1 and 2 respectively,
and p1, and p2 are the prices charged in the two segments.
The cost function is C = 50 + 20(q1 + q2)
b) Assume that these conditions are met. Calculate for each market segment
the equilibrium price, quantity and profit.
c) Show that the higher price is charged in the relatively more inelastic
segment of the market.
d) If the monopolist cannot discriminate and it has to charge one price what
price will it charge and what quantity would it produce? What will be the
profit under this scenario?
e) Describe the optimal two-part pricing strategy for the firm. How much
profit does the firm earn from this strategy?
The table shows units of output, value of output and number of people employed in an industry over three years, what can be concluded from the table?
THE BOATYARD LIMITED
DRAFT TRIAL BALANCE AT 31 DECEMBER 20X6
Debit
Credit
Ordinary share capital
2,000,000
Retained earnings
1,592,500
Land: Cost
5,000,000
Office equipment: Cost
1,100,000
Office equipment: Accumulated depreciation
550,000
Motor Vehicles: Cost
2,000,000
Motor Vehicle: Accumulated depreciation
800,000
Accounts receivable
675,000
Inventory
2,225,000
Cash and Bank
1,477,500
Borrowings
5,600,000
Accounts payable
760,000
Sales
9,125,000
Cost of Sales
5,475,000
Salaries expense
905,000
Bad debts expense
62,500
Marketing Expense
100,000
Depreciation: Motor vehicles
400,000
Depreciation: Office equipment
275,000
Repairs and maintenance
30,000
Travel expense
82,500
1) Prepare the statement of profit or loss and other comprehensive income of the Boatyard Limited for the year ended 31 December 20x6 in accordance with International Financial Reporting Standards. (15 marks)
2) Prepare the current assets and current liabilities sections only of the statement of financial position the Boatyard Limited at 31 December 20x6 in accordance with International Financial Reporting Standards. (6 marks)
3) Prepare the statement of changes in equity of Boatyard Limited for the year ended 31 December 20x6 in accordance with International Financial Reporting Standards. (7 marks)
Assessment 2.4
Cite two reasons why the commercial genre in Thailand has blossomed. Give a brief explanation for each.
a) Frenzi Communications Inc. (FCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. FCI’s tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. FCI paid a dividend of Gh₵3.70 per share last year (D0), and its stock currently sells at a price of Gh₵60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and FCI’s beta is 1.3. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of Gh₵100 per share, with a dividend of Gh₵9. Flotation costs of Gh₵5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings. i. Find the component costs of debt, preferred stock, and common stock. (9 marks) ii. What is the WACC? b) Identify and describe the phases of capital budgeting.
Examine how the concepts of agency theory can be used to explain the relationship that exists between the managers of a listed company and its shareholders. Your answer should include an explanation of the following : i. asymmetry of information; [5 marks] ii. agency costs; [5 marks] b) The primary financial objective of a business is stated by corporate finance theory to be maximising shareholder wealth as against profit maximisation, sales maximisation, and maximisation of benefit to employees and the local community. Provide a reasoned argument in support that wealth maximisation should be the main goal of the financial manager. [15 marks
