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APC 308 Financial Management

APC 308 Financial Management Assessment 2019

Assessment

UNIVERSITY OFSUNDERLAND

Faculty of Business and Law APC308 Financial Management - Individualassignment

Weighting – 100% of the marks for thismodule

This is an individual assignment of 3,000 words. (+ or –10%)

Students are required to submit their assignments through Turnitin on Canvas then to JIRA. Only assessments submitted through

JIRA and Canvas will be marked.Requirements:

You must answer any TWO questions. Each question that is attempted will carry a maximum mark of50%

     

Question 1: Cost of capital and Capital structure

The finance director of Kadlex plc is currently reviewing the capital structure of her company. She is convinced that the company is not financing itself in a way that minimizes its cost of capital (WACC). The company’s financing as at 31 December 2017 is as follows:

Ordinary shares, £1each                                                           20000
Reserves                                                                                             5000
7% preference shares, £1each                                                10000
10% bonds (irredeemable 31 December2017)                 15000

Total capital                                                                                     50000

  

Other information from stock market (as at 31December 2017):

Ordinary share price (ex-div)                                   £2.65

Preference share price (ex-div)                                75p           

Bond price for 10% bonds                                          £107 per £100                                                                

Last 5 years’ dividends (most recent last)            21p, 23p, 25p 27p, 28p

                                           

The finance director feels that by issuing more debt the company will be able to reduce its cost of capital. She proposes the issue of £15m of 11 per cent bonds. These bonds will be sold at a 5 per cent premium to their par value and will mature after seven years. The funds raised will be used to repurchase ordinary shares which the company will then cancel. She expectsthe repurchase will cause the company’s share price to rise to £2.85 and the future dividend growth rate to increase by 20 per cent (in relative terms). She expects the price of the 10 per cent bonds to be unaffected, but the price of the preference shares to fall to 68p. Corporate tax stands at 30 per cent.

(a) Calculate the book value and market value cost of capital (WACC) for Kadlex plc.(10 marks)

(b) Given the proposed changes to Kadlex’s capital structure, recalculate the company’s cost of capital to reflect these changes and comment on the finance director’s projections. (10 marks)

(c) Critically discuss whether you consider that companies, by integrating a sensible level of gearing into their capital structure, can minimise their weighted average cost of capital, ensuring the response integrates relevant empirical research within this area of study.

(15 marks)

(d) Critically evaluate the effects of short-termism on bankruptcy and the agency problem in a company, ensuring the response is supported with relevant academic research.

(15 marks)

Question 2 – Long term finance: Equity finance

(a) Lexbel plc generates earnings after tax (PAT) of 20 per cent on shareholders’ funds. Its current capital structure is as follows:


Ordinary shares of 50p each                           £300,000

Reserves                                                                  400,000 

                                                                                     700,000

The board of Lexbel plc wishes to raise £180,000 from a right issue in order to expand existing operations. Its return on shareholders’ funds will be unchanged. The current ex- dividend market price of Lexbel plc is £1.90. Three different rights issue prices have been suggested by the finance director: £1.80, £1.60 and£1.40.

(b) Determine the:

i. number of shares to be issued.

ii. theoretical ex-rights price.

iii. expected earnings per share and

iv. form of the issue for each rights issue price, and

v. Present your results in a tabular form and critically evaluate the best option among the three right issues.

(20 marks)

(c) It has become common for companies to offer their shareholders a choice between a cash dividend and an equivalent scrip dividend. Critically discuss the advantages of scrip dividends from the point of view of the company and the shareholders, ensuring the response draws upon relevant academic research within this highly topical area of financial management.

  

(30 marks)

Question 3 Investment AppraisalTechniques

Question 3 Investment Appraisal Techniques

Lovewell Limited a food manufacturer is considering purchasing a new machine for

£275,000. The company is expecting an annual cash inflow of £85,000 from the sale ofproducts and an annual cash outflow of £12,500 for each of the six years of the machine’suseful life. The annual cash outflows do not include annual depreciation charges for the machine. The machine is depreciated using the straight –line method. The machine is expected to last for six years, with a residual value estimated to be at the rate of 15% of the original cost of the machine. The cost of capital for Lovewell Limited is 12%.

You are required to:

(a) Calculate using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine:

  1. The Payback Period.
  2. The Accounting Rate of Return.
  3. The Net Present Value.
  4. The Internal Rate of Return (to two decimal places)

(b) Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques, ensuring the response is supported with relevant academic research.

(30 marks)

(20 marks)

Table 1 Applied Penalties for exceeding the word count.

Word limit
Penalty
Actual Word Count
Exceeds limit by up to 10%
No penalty – tolerance band (see below)
3300
Exceeds limit by 10.1-20%
-5%
3301 – 3600
Exceeds limit by 20.1-30%
-10 %
3601 - 3900
Exceeds limit by 30.1-40%
-15 %
3901 - 4200
Exceeds limit by 40.1-50%
-20 %
4201 - 4500
Exceeds limit by more than 50%
Mark of zero
 
4501+
 

The learning outcomes for this module assessed by this piece of workare:


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