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Corporate Finance-Assignment

This document is a confidential assignment for a Corporate Finance course. It contains 3 questions regarding capital investment projects. Question 1 asks to explain 3 advantages and disadvantages of listing a company on the stock exchange. Question 2 provides details of a capital expenditure project for Bow Berhad and asks to calculate the net present value and internal rate of return. Question 2b describes 5 mutually exclusive investment projects for Rundle Berhad and asks to determine which projects maximize net present value given a budget. Question 3 provides extensive details regarding a new product investment for Goji Ltd, and asks to identify non-relevant costs, prepare a net cash flows table, calculate net present value and internal rate of return, and state whether the company should produce

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224 views4 pages

Corporate Finance-Assignment

This document is a confidential assignment for a Corporate Finance course. It contains 3 questions regarding capital investment projects. Question 1 asks to explain 3 advantages and disadvantages of listing a company on the stock exchange. Question 2 provides details of a capital expenditure project for Bow Berhad and asks to calculate the net present value and internal rate of return. Question 2b describes 5 mutually exclusive investment projects for Rundle Berhad and asks to determine which projects maximize net present value given a budget. Question 3 provides extensive details regarding a new product investment for Goji Ltd, and asks to identify non-relevant costs, prepare a net cash flows table, calculate net present value and internal rate of return, and state whether the company should produce

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CONFIDENTIAL 1

Sekolah Pendidikan Profesional dan Pendidikan


Berterusan Universiti Teknologi Malaysia

ASSIGNMEN

SUBJECT CODE : PFTF 2063


COURSE NAME : Corporate Finance
LECTURER’S : WONG SENG WEE
NAME : Professional Diploma in Accounting &
Finance
PROGRAMME
:
DATE
:
TIME
: 100
FULL MARK

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CONFIDENTIA
CONFIDENTIAL 2

Question 1

Explain THREE advantages and THREE disadvantages of getting listed in Bursa Malaysia.
(20 marks)

Question 2
(a) Bow Berhad is evaluating a new capital expenditure project. The details are as follows:
1. The project requires an immediate cost of RM2,100,000 and residual value of RM15,000.
2. Sales are expected to be RM1,550,000 per annum for years 1 to 3, falling to RM650,000
per annum for the two years after that. No further sales of the product are expected after
the end of this five-year period.
3. Cost of sales is 40% of sales.
4. Distribution costs represent 10% of sales.
5. Administrative costs are 5% of sales.
6. The company’s cost of capital is 10%.

Discount factors: Year 10% 12%


1 0.909 0.893
2 0.826 0.797
3 0.751 0.712
4 0.683 0.636
5 0.621 0.567

Required:

Calculate, in relation to the investment project, the:

(i) Net Present Value (NPV). (15 marks)


(ii) Internal Rate of Return (IRR) to the nearest percent. (10 marks)

(b) Rundle Berhad has a maximum of RM 55,000 to undertake the following


mutually exclusive investment projects which all yield positive net present
values:

Project Initial cost Present value of net cash


(RM) flows (RM)
A 35,000 39,325
B 20,000 22,930
C 25,000 27,453
D 10,000 10,854
E 9,000 8,749

Assume that investment projects are divisible (meaning it is possible to undertake only a part
of each investment project).

Required:

Prepare suitable calculations to determine which of the investment projects the company
should undertake in order to maximise net present value. (15 marks)

(Total 40 marks)

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CONFIDENTIA
CONFIDENTIAL 3

Question 3
Goji Ltd produces a wide range of toys. Recently, it has developed a new product and the directors
of the company are now considering whether this product should be put into production.

The following information is produced to help evaluate the commercial viability of the new product.
1. The cost of developing the new product was RM130,000. In addition, market research was
carried out by a firm of marketing consultant at a cost of RM90,000.

2. The company expects to sell 10,000 units of new product per year for each of the next five
years. The selling price of each unit will be RM65.

3. If production does not go ahead, machinery will be sold immediately for RM790,000.
However, if production goes ahead, the machinery will be sold at the end of five years for
RM70,000.

4. Additional working capital of RM150,000 will be required immediately in order to support


production of the new product. This can be released at the end of the production period.

5. To produce the new product, each product requires one kilo of Type A and three kilos of
Type B material.

(a) Type A material was purchased at a cost of RM14 per kilo in the past but now the
supplier has raised the price to RM15 per kilo.

(b) Type B material was purchased at RM2 per kilo in the past but now the
replacement cost is RM2.50 per kilo.

6. Labour costs are estimated at RM12 per unit of product.

7. Total fixed costs apportioned to the new product will be RM200,000 per annum of which
RM60,000 per annum is an incremental cost as a direct result of the decision to produce
the new product.

The company has a cost of capital of 12%.

Discount factors: Year 12% 18%


1 0.893 0.847
2 0.797 0.718
3 0.712 0.609
4 0.636 0.516
5 0.567 0.437

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CONFIDENTIA
CONFIDENTIAL 4

Required:

For this new product investment,

(a) List and explain two non-relevant costs. (6 marks)

(b) Prepare the net cash flows table. (10 marks)

(c) Calculate the net present value (NPV). (10 marks)

(d) Calculate the Internal Rate of Return (IRR) to the nearest percent. (10 marks)

(e) State whether the Goji Ltd should produce this product. (4 mark)

(Total 40

marks)

---End of the assignment paper---

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CONFIDENTIA

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