Finance For Managers

Solve Section A only please.

May I know how to calculate please, I want to know the detailed step.

Finance for managers

BEA3008
UNIVERSITY OF EXETER
BUSINESS SCHOOL
May 2019
FINANCE FOR MANAGERS
Module Convenor: Aurel Kucani
Duration: TWO HOURS
Answer TWO questions from SECTION A
AND
Answer TWO questions from SECTION B
100 marks in total available on this paper
(which will be scaled to represent 80% of overall module marks)
Section A: Each question carries 25 marks. You have a free choice of two from three questions.
Section B: Each question carries 25 marks. You have a free choice of two from three questions.
Commence each question on a new sheet of paper.
You should explain any symbols you use and show clear workings.
Materials to be supplied:
Formula sheet and present value tables are attached.
Materials to be supplied on request:
None
Approved calculators permitted.
This is a closed note examination.
2
BEA3008 Turn over
SECTION A
(Answer TWO questions only)
QUESTION A1
a) You have just turned 30 years old, and now you must decide how much money to put into
your retirement plan. You decide that you will plan to work until you turn 60 and live to 80.
The plan works as follows: every pound in the plan earns 6% per year. You cannot make
withdrawals until you retire on your 60th birthday. After that point, you can make withdrawals
as you see fit. You estimate that to live comfortably in retirement, you will need £50,000 per
year starting at the end of the first year of retirement and ending on your 80th birthday.
Assume that your starting salary is £70,000 per year and it will grow 5% per year until you
retire. What percentage of your income do you need to contribute to the plan every year to
fund the retirement income?
(11 marks)
b) Suppose that there are only two possible future states of the world. In one state a company’s
share price will rise by 40% from its current level, and in the second state it will drop by
25%. The current share price is £100, the exercise price of a European call option written
on this share is £110, and the risk-free rate of interest for the period until expiration of the
option is 4%. Calculate the hedge ratio and the current value of the call option using a oneperiod binomial option pricing model.
(6 marks)
c) Discuss the advantages and disadvantages of the following investment appraisal technique:
Net present value.
(8 marks)
[25 marks in total]
3
BEA3008 Turn over
QUESTION A2
a) The finance director of Tarata is concerned about the lax management of the company’s
trade receivables. The trade terms of Tarata require settlement within 30 days, but its
customers take an average of 50 days to pay their bills. In addition, out of total credit sales
of £10 million per year, the company suffers bad debts of £150,000 per year. Tarata finances
working capital needs with an overdraft at a rate of 9% per year. The finance director is
reviewing two options:
Option 1: offering a discount of 1% for payment within 30 days. It is expected that
40% of customers will take the discount, while the average time taken to pay by the
remaining customers will remain unchanged. As a result of the policy change, bad
debts would fall by £50,000 per year and administration costs by £15,000 per year.
Option 2: the debt administration and credit control of Tarata would be taken over
by a factoring company. The annual fee charged by the factor would be 1.8% of
sales. Tarata would gain administration cost savings of £140,000 per year and a 90%
reduction in bad debts. The factor would reduce the average trade receivables days
of Tarata to 30 days and would advance 80% of invoices at an interest rate of 13%.
Which option should the finance director choose?
(14 marks)
b) Sinkus Ltd produces chairs and tables from material provided by local suppliers. The
company has an estimated requirement in 2019 for 24,000 units of stock from its suppliers
to meet customer demand. Sinkus’s estimated annual carrying cost per unit of stock is £6,
and its estimated cost of placing and receiving each stock order is £40.
i. On the assumption that Sinkus Ltd will not consider stockouts, perform calculations
to ascertain Sinkus’s optimal 2019 stock ordering policy; and the total annual cost of
this policy.
ii. Sinkus Ltd is considering allowing stockouts to occur and estimates that the cost of
such would be £10 per unit of average stockout. Assuming that Sinkus is willing to
face stockouts, re-perform calculations to ascertain Sinkus’s optimal 2019 stock
ordering policy; and the total annual cost of this policy.
(11 marks)
[25 marks in total]
4
BEA3008 Turn over
QUESTION A3
a) A two-asset economy comprises assets with the parameters in the following table and a
covariance of return between the two assets of -0.2.
Asset 1 Asset 2
Expected return 0.04 0.2
Variance of returns 0.2 0.5
The market portfolio has an expected return of 0.12 and standard deviation of returns of
0.237. The risk-free rate of return is 4%.
Required:
i. Explain and discuss beta under the Capital Asset Pricing Model (CAPM).
(7 marks)
ii. Calculate the CAPM beta of asset 1.
(5 marks)
iii. Confirm that CAPM holds for asset 1.
(2 marks)
b) Aler plc has a current share price of 110 pence cum dividend. The dividend last year was
10 pence per share. The company has, and intends to maintain, a policy of increasing its
annual dividend by 5% each year. It has a debt to equity ratio of 1:2 and the pre-tax market
cost of debt is 10% per annum. The company operates in a perfect capital market with the
exception that corporation tax is charged at 30%. It has substantial taxable profits and its
debt and equity prices are in equilibrium.
Required:
i. Calculate the company’s existing cost of equity capital (rounded to four decimal
places).
(3 marks)
ii. Deduce what the cost of equity would be if the company were all equity financed
(rounded to four decimal places).
(5 marks)
iii. Decide whether or not the company should undertake a project that would provide
an internal rate of return of 10.2 % with the existing capital structure.
(3 marks)
[25 marks in total]
5
BEA3008 Turn over
SECTION B
(Answer TWO questions only)
QUESTION B1
d) Define market efficiency and critically discuss its implications to investors and firms’
managers.
(15 marks)
e) Define risk management and discuss some of the techniques available to reduce risk
exposure.
(10 marks)
[25 marks in total]
QUESTION B2
a) In the context of portfolio theory, assuming no risk-free asset, define the feasible
(opportunity) set and explain how it differs from the Mean-Variance Efficient (MVE) frontier.
How would a risk-averse investor choose their optimal portfolio? (Use appropriate, welllabelled diagrams to illustrate your answer).
(15 marks)
b) In the context of dividend policy irrelevance discuss the following theories: clientele effect,
signalling theory, and bird-in-hand argument.
(10 marks)
[25 marks in total]
QUESTION B3
a) From the perspective of the firm which requires financing, critically discuss the
characteristics of the following sources of long-term finance: ordinary shares and preference
shares.
(12 marks)
b) Explain what is meant by the Pecking-order theory and how it relates to observed capital
structure of companies.
(13 marks)
[25 marks in total]
END OF PAPER
FORMULAE SHEET AND TABLES FOLLOW
6
BEA3008 Turn over
FORMULAE SHEET
IRR ≈ R1 + NPV 1 x (R2 – R1)
(NPV1 – NPV2)
Inventory
Cost of sales x 365 = Inventory period
Accounts Receivable
Credit Sales x 365 = Accounts Receivable Period
Accounts Payable
Credit Purchases x 365 = Accounts Payable period
Cash Cycle = Inventor Period + Accounts Receivable Period – Accounts Payable Period
Eൣr୮൧ = ωଵE[rଵ
] + ωଶE[rଶ
] Varൣr୮൧ = σ୮
ଶ = ωଵ
ଶσଵ
ଶ + 2ωଵωଶσଵ,ଶ + ωଶ
ଶσଶ
ଶ
E(r୮) = r୤ +
(E(r୫) − r୤)
σ୫
σ୮
( ) ( ( ) )
f m f E rj  r  j E r  r
C =
P
ଷC୳
య + 3P
ଶ(1 − P)Cୢ୳మ + 3P(1 − P)
ଶC୳ୢమ + (1 − P)
ଷCୢ
య
Rଷ
WACC =
kୣS + (1 − tୡ)kୢB
S + B
WACC = ρ (1 − tୡ
B
B + S
)
TABLES FOLLOW
     

N
n
n i n i Var Ri i P R E R
1
,
2 2
( )  ( )
Std (R ) Var(R ) i   i  i
( , )   ( ( ))( ( )) , ,
1
Cov R R P Ri n E Ri Rj n E Rj
N
n
i j   n  

E R P Ri n
N
n
i n ,
1
( )  

Table 1: Present value of 1 unit received n periods in the future with an assumed appropriate constant discount rate of r per period
r
n
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
21 0.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022
22 0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018
23 0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015
24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013
25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010
26 0.772 0.598 0.464 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.011 0.009
27 0.764 0.586 0.450 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007
28 0.757 0.574 0.437 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.008 0.006
29 0.749 0.563 0.424 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011 0.008 0.006 0.005
30 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004
BEA3008 7 Turn Over
8

Table 2: Present value of an annuity of 1 unit received at the end of each of the next n periods with an assumed appropriate constant discount rate
of r per period
r
n
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891
22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909
23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948
26 22.795 20.121 17.877 15.983 14.375 13.003 11.826 10.810 9.929 9.161 8.488 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.206 4.956
27 23.560 20.707 18.327 16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964
28 24.316 21.281 18.764 16.663 14.898 13.406 12.137 11.051 10.116 9.307 8.602 7.984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970
29 25.066 21.844 19.188 16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7.470 6.983 6.551 6.166 5.820 5.510 5.229 4.975
30 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979
End of Paper BEA3008

BEA3008
UNIVERSITY OF EXETER
BUSINESS SCHOOL
May 2018
FINANCE FOR MANAGERS
Module Convenor: Aurel Kucani
Duration: TWO HOURS
Answer TWO questions from SECTION A
AND
Answer TWO questions from SECTION B
100 marks in total available on this paper
(which will be scaled to represent 80% of overall module marks)
Section A: Each question carries 25 marks. You have a free choice of two from three questions.
Section B: Each question carries 25 marks. You have a free choice of two from three questions.
Commence each question on a new sheet of paper.
You should explain any symbols you use and show clear workings.
Materials to be supplied:
Formula sheet and present value tables are attached.
Materials to be supplied on request:
None
Approved calculators permitted.
This is a closed note examination.
2
BEA3008 Turn over
SECTION A
(Answer TWO questions only)
QUESTION A1
a) Shares in Landau plc are traded on the stock market, and are currently valued at £5 per
share. The expected annually compounded annual risk-free rate of interest is 8%.
i. Assuming that the share price of Landau plc will either fall in value by 20% or rise in
value by 50% each year, calculate the value, according to the binomial option pricing
model, of a European call option which entitles its holder to buy one share in Landau
plc for £8 in three years’ time (rounded to two decimal places).
(9 marks)
ii. Making the same assumptions as in part (i) above, what is the value, according to the
binomial option pricing model, of a put option which entitles its holder to sell one share
in Landau plc for £8 in three years’ time (rounded to two decimal places)?
(3 marks)
b) Define risk and distinguish between systematic and unsystematic risk. Explain why the
standard deviation of a portfolio is usually smaller than the standard deviations of the
assets that comprise the portfolio.
(13 marks)
[25 marks in total]
3
BEA3008 Turn over
QUESTION A2
Given the following information in a particular economy:
Alternative states of the
world (all equally likely)
Market
Return
Return on
security A
Return on
security B
Risk free
return

One -0.01 -0.14 -0.07 0.03
Two 0.04 0.15 0.03 0.03
Three 0.12 0.20 0.16 0.03
(a) Deduce the equation for the Capital Market Line (CML) in this economy;
(4 marks)
(b) Plot the CML deduced in part (a);
(2 marks)
(c) Find whether security B lies on the CML and explain what it means if security B is
not on the CML;
(5 marks)
(d) Deduce the equation for the Security Market Line (SML);
(2 marks)
(e) Calculate the beta for security A;
(4 marks)
(f) Find whether security A lies on the SML and explain what it means if security A is
not on the SML (use appropriate, well-labelled diagrams to illustrate your answer);

(6 marks)
(g) What is the beta for a portfolio split equally between the market portfolio and the
risk- free asset?
(2 marks)
[25 marks in total]
4
BEA3008 Turn over
QUESTION A3
a) Mira Plc exists in a world without personal or corporate taxes. The firm is financed by way
of 400,000 equity shares of £1 each nominal value and £120,000 (nominal value) 5%
redeemable debt. The shares have a current market value of £1.80 per share cum
dividend, with a dividend of 30 pence per share about to be paid. Total dividends on the
shares over the past four years have been £56,000, £72,000, £89,000 and £104,000, and
the total dividend about to be paid is £120,000. The market value of the firm’s debt is
currently £75 per nominal £100. Debt interest for the year is about to be paid, and a
premium of 1% is payable on redemption of the debt in four years’ time.
Calculate:
i. Cost of equity
(3 marks)
ii. Cost of debt
(7 marks)
iii. Weighted average cost of capital
(5 marks)
b) Era Ltd has an estimated requirement in 2018 for 10,000 units of stock from their supplier
to meet customer demand. Era’s estimated annual carrying cost per unit of stock is £4,
and its estimated cost of placing and receiving each stock order is £60. Era is willing to
face stock-outs and the cost of such is estimated to be £6 per unit of average stock-out. If
Era attempts to minimise overall inventory-related costs, what will be the company’s total
inventory-related costs for 2018?
(5 marks)
c) Brisk plc is considering liberalisation of its credit policy. In particular, it is prepared to
increase average accounts receivable from £7,000 to £17,000. This would lead to an
increase in units sold of 4,000 units, where current contribution margin is £2/unit. The
credit collection expenses are expected to increase as a result by £2,900 per annum, and
bad debt losses by £1,800 per annum. Green plc would have to finance increased
investment required by issuing equity capital, and the current cost of equity capital is 19%
per annum. Should the company change to the credit policy under consideration?
(5 marks)
[25 marks in total]
5
BEA3008 End of question paper
SECTION B
(Answer TWO questions only)
QUESTION B1
Critically compare and contrast the following investment appraisal techniques: net present
value, internal rate of return, and payback period.
[25 marks in total]
QUESTION B2
Critically discuss why companies pay dividends, particularly in light of the tax costs to
shareholders of receiving dividends when the marginal rate of income tax exceeds the
marginal rate of capital gains tax. (You should pay particular attention to practical issues,
clientele effect, signalling theory, bird-in-hand argument, agency theory and nature of the
firm).
[25 marks in total]
QUESTION B3
a) Critically explain the Modigliani and Miller (1958, 1963) approaches to capital structure.
(17 marks)
b) Explain the Random Walk Hypothesis and discuss its practical implications for
investors.
(8 marks)
[25 marks in total]
END OF PAPER
FORMULAE SHEET AND TABLES FOLLOW
6
BEA3008
FORMULAE SHEET
IRR ≈ R1 + NPV 1 x (R2 – R1)
(NPV1 – NPV2)



 

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 365  
  

  
 


 365  
   
Cash Cycle = Inventor Period + Accounts Receivable Period – Accounts Payable Period
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TABLES FOLLOW
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Table 1: Present value of 1 unit received n periods in the future with an assumed appropriate constant discount rate of r per period
r
n
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
21 0.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022
22 0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018
23 0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015
24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013
25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010
26 0.772 0.598 0.464 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.011 0.009
27 0.764 0.586 0.450 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007
28 0.757 0.574 0.437 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.008 0.006
29 0.749 0.563 0.424 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011 0.008 0.006 0.005
30 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004
BEA3008 7 Turn Over
8
Table 2: Present value of an annuity of 1 unit received at the end of each of the next n periods with an assumed appropriate constant discount rate
of r per period
r
n
1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891
22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909
23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948
26 22.795 20.121 17.877 15.983 14.375 13.003 11.826 10.810 9.929 9.161 8.488 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.206 4.956
27 23.560 20.707 18.327 16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964
28 24.316 21.281 18.764 16.663 14.898 13.406 12.137 11.051 10.116 9.307 8.602 7.984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970
29 25.066 21.844 19.188 16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7.470 6.983 6.551 6.166 5.820 5.510 5.229 4.975
30 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979
BEA3008