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Questions on Financial Management

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Management Development Institute of Singapore Questions on Financial Management UNIVERSITY OF WALES MASTER OF BUSINESS ASMINISTRATION MBWD5 0306A SONG YANG G0262693X CHEN HUIHUI G0260998W TU XIAOXIN G0174023M LI XING G0231389N 17/Aug/04 TABLE OF CONTENTS Page QUESTION -----------------------------------------------------------------3 a) i. NPV and IRR ---------------------------------------------------------3 a) ii. Sensitivity Analysis -------------------------------------------------5 b) Merits and Drawbacks of the Use of IRR ------------------------7 QUESTION 2 --------------------------------------------------------------9 a) i. Dividend model ------------------------------------------------------9 a) ii. Earnings based model---------------------------------------------9 a) iii. Assumptions --------------------------------------------------------10 b) Price earnings ratio---------------------------------------------------10 QUESTION 3-------------------------------------------------------------13 a)i. earning per share---------------------------------------------------13 a)ii. Level of earning at which EPS will be same----------------13 b) Factors that limit the amount of debt----------------------------14 c) Dividend Payment Policies----------------------------------------15 Bibliography -----------------------------------------------------------17 QUESTION 1: Capital Expenditure Decisions and Investment Criteria a) i. NPV and IRR The worksheet for Cash Flows of the Pentre plc ('000) Year0 Year1 Year2 Year3 Year4 Year5 Investments: 1. Production line 2. Ad & Marketing 3. Working Capital (20% of sale) 4. Change in net WC (8000) (2000) 0 (360) 360 (72) 432 0 432 0 432 0 432 432 Total cash flow of investment (1,2,3,5) (10360) (72) 0 0 0 432 Income: 5. Sales revenues 6. Total cost 7. Opportunity cost 8. Depreciation 9. Residual value 10. Income bf taxes 11. Tax (35%) 12. Net Income 0 6000 (2600) (25) (1500) 1875 (656.25) 1218.75 7200 (2960) (25) (1500) 2715 (950.25) 1764.75 7200 (2960) (25) (1500) 2715 (950.25) 1764.75 7200 (2960) (25) (1500) 2715 (950.25) 1764.75 7200 (2960) (25) (1500) 500 3215 (1125.25) 2089.75 Operating Revenues and Costs ('000) Year Sales Volume Price Sales Revenues Fixed Cost Direct Cost($120) Total Cost 1 2 15 18 400 400 6000 7200 (800) (800) (1800) (2160) (2600) (2960) 3 4 5 18 18 18 400 400 400 7200 7200 7200 (800) (800) (800) (2160) (2160) (2160) (2960) (2960) (2960) Cash Flows of Company ('000) Year0 Year1 Year2 Year3 Year4 Year5 Sales revenue Cost Opportunity cost Taxes Residual value Cash flow (Operations) 6000 (2600) (25) (656.25) 2718.75 7200 (2960) (25) (950.25) 3264.75 7200 (2960) (25) (950.25) ...read more.


* 0.5718 = 116.17 / (15%-3.75%) * 0.5718 = 590.45 V0 = 2000 + 415.25+ 590.45 = 3005.7 a) iii. Assumptions > There are no taxes. The absence of corporate income taxes is assumed. > There are no costs of financial distress. For example, there are no transactions costs, and all securities are infinitely divisible. > There are no asymmetries of information. It implies that the expected values of the probability distributions of expected operating earnings for all future periods are the same as present operating earnings. > The investment and operating policies of the firm are given and investors are assumed to be rational and to behave accordingly. b) Price earnings ratio A price-earning ratio is a commonly used way to simplistically value a company, determine what a company's stock should be worth. It is also known as "P/E", is calculated by dividing the company's stock price by the company's earnings per share, or "EPS". The P/E ratio gives an indication of how many times shareholders paying for a company's stock compares a company's earnings. P/E ratios can be used to compare against other companies, or against a company's own historical P/E ratio. Investors usually are willing to pay a higher P/E for companies they judge will be growing faster than the norm even though they do not pay those earnings out in dividends but retain them to fund future growth. If that growth is realized, the price of the company's stock usually grows faster than the overall stock price of the slower growth or higher dividend paying company. However, if estimated earnings are not realized or the stock market itself loses favor with the investor, such as higher interest rates attracting investment capital, the downside potential is greater as well. The risk is not just the ability of the company to create profits, but the investment risk in the higher price you paid relative to earnings. ...read more.


Dividend is payable in full on shares held for a duration of 12 calendar months during the financial year and on a pro-rated basis on shares held for less than 12 months. http://www.google.com.sg/search?q=cache:XweOBesthMcJ:incnet.income.com.sg/uishare/main.aspx+dividend+policy&hl=en 2. stable 'growth rate' - set target growth rate for dividend and strives to increase dividend by that amount every year ACOM CO., LTD. (Tokyo Stock Exchange) ACOM's dividend policy is to provide shareholders with stable dividend growth. Dividends for the fiscal year under review included an amount equivalent to the commemorative dividends paid last year in the interim and year-end dividends as well as a �5.00 per share increase in the term-end dividend, to �22.50. Consequently, the total year dividend for fiscal 1998 was �40.00 per share, a rise of �5.00 from the previous year. This represents a payout ratio of 13.3% and a 2.0% dividend on equity. www.c-direct.ne.jp/english/ divide/10108572/8572_98/8572e_02.pdf 3. Constant payout - pay certain amount of earnings as dividends (or pay a constant $ amount each year). Neptune Orient Lines (NOL) NOL is a global transportation company, with core businesses involved in container transportation and supply chain management. NOL intends to maintain an annual dividend of 8 Singapore cents per share net, or a full year dividend payout of 20% of net profits, whichever is higher. In line with this policy, the Board of Directors has declared an interim dividend of 7 Singapore cents per share net (8.75 cents gross). This dividend is issued out of existing Section 44 tax credits and is payable on 30 August 2004. http://www.nol.com.sg/newsroom/04news/040727.html 4. low regular dividend plus 'extra' - pay a low regular dividend and an extra at the end of the year (depending on the earnings performance that year) SINGAPORE Exchange (SGX) July 30, 2004 SGX proposed a final dividend of 4.075 cents per share and a special dividend of 6.5 cents, bringing the total payout for FY04 to 13.5 cents per share. It paid 40.5 cents per share in dividends last year, including a special 34-cent dividend from the liquidation of assets. http://business-times.asia1.com/story/0,4567,124036,00. ...read more.

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