Financial Management Case Study: Daisy Brown And Interstate Haulage Ltd

Net profits and dividend payouts

1. a) 

Dividend to be received in May 2018 (in $)

=  Net profit for 2018 x share % x dividend pay-out ratio

=  600000 x 15% x 75%

=  67,500 

Dividend to be received in May 2019 (in $)

=  Net profit for 2018 x (1 + growth rate) x share % x dividend pay-out ratio

=  600000 x (1 + 30%) x 15% x 75%

=  87,750 

Amount required in late May 2019 (in $) =  100,000

Dividend to be received in May 2019 (in $) =  87,750 

Remaining (in $) =  100000 – 87750

=  12,250 

Value of 12,250 in May 2018 (in $)

=  Present value of 12,250 for one year at interest rate of 10%

=  12250 / (1 + 10%)

=  11,136 

She can consume in May 2018 (in $) =  67500 – 11136

=  56,364

1. b)

Discount rate = 6%

Cost of System P (in $) =  200,000

Useful life (in years) = 3

Operating cost per annum (in $) =  10,000 

Present value annuity factor for 3 years at 6% =  2.6730 

Annual Equivalent cost (in $)

=  (Cost of system / PVAF) + operating cost

=  (200000 / 2.6730) + 10000

=  84,822 

Discount rate = 6%

Cost of System Q (in $) =  240,000

Useful life (in years) = 4

Operating cost per annum (in $) =  12,000 

Present value annuity factor for 4 years at 6% =  3.4651 

Annual Equivalent cost (in $)

=  (Cost of system / PVAF) + operating cost

=  (240000 / 3.4651) + 12000

=  81,262 

Since AEC of system Q is less than that of system P. System Q should be selected.  

1. c) 

Face value of Notes (in $) =  1,000.00

Coupon rate per annum = 14%

Interest amount (in $) =  Face value x coupon rate

=  1000 x 14%

=  140.00 

Required rate of return = 18% 

As per details given in the question, payment will be done as given below. 

Particulars	Amount ($)	Payment year no.
Interest of May-19 paid in May-23	140.00	5
Interest of May-20 paid in May-23	140.00	5
Interest of May-21 paid in May-21	140.00	3
Interest of May-22 paid in May-22	140.00	4
Interest of May-23 paid in May-23	140.00	5
Repayment	1,000.00	5

Year	Amount	PVF	PV
3	140.00	0.6086	85.21
4	140.00	0.5158	72.21
5	1,420.00	0.4371	620.70
			778.11

Current value of each unsecured note (in $) =  778.11 

Answer 4 

1. a) 

Tax rate = 30%

Cost of capital = 10%

Working capital requirement (in $) =  30,000 

New Trucks 

Cost of each truck (in $) =  500,000

Total cost of truck (in $) =  Cost of each truck x 2

=  500000 x 2

=  1,000,000 

Useful life of new trucks (in years) = 4

Total depreciation on new trucks (in $) =  1000000 / 4

=  250,000.00 

Total salvage value new trucks (in $) =  150000 x 2

=  300,000 

Savings in storage costs (in $) =  50,000

Savings in labour costs (in $) =  200,000 

Tax deductible expenses in year 2 (in $) =  40,000

Tax deductible expenses in year 3 (in $) =  50,000 

Old Trucks 

Carrying value of old trucks (in $) = Cost of truck x 3 x (1 – 20%)

=  250000 x 3 x (1 – 20%)

=  600,000 

Sale price of old trucks (in $) = 100000 x 3

= 300,000 

Initial cash outflow (in $) = Working capital + cost of new trucks

= 30000 + 1000000

=  1,030,000  

Loss on sale of old trucks (in $)

= Carrying value of old trucks – Sale price of old trucks

= 600000 – 300000

=  300,000

Tax savings on loss (in $) =  300000 x 30%

=  90,000 

Net cash outflow on sale of old trucks (in $)

= Loss on sale of old trucks – tax savings

= 300000 – 90000

=  210,000 

Profit on sale of old trucks (in $)

= Sale price of old trucks – Carrying value of old trucks

= 300000 – 0

= 300000

Tax on profit (in $) =  300000 x 30%

=  90,000 

Net cash inflow on sale of new trucks (in $)

= Profit on sale of old trucks – tax on profit

= 300000 – 90000

=  210,000 

Total terminal cash inflow

=  Working capital – Net cash outflow on sale of old trucks + Net cash inflow on sale of new trucks

=  30000 – 210000 + 210000

=  30,000   

Year	1	2	3	4
Savings in storage costs	50,000	50,000	50,000	50,000
Savings in labour costs	200,000	200,000	200,000	200,000
Less: Depreciation	-250,000	-250,000	-250,000	-250,000
Less: Overhauling expenses		-40,000	-50,000
Profit before tax	–	-40,000	-50,000	–
Add: Tax savings	–	12,000	15,000	–
Net profit	–	-28,000	-35,000	–
Add: Depreciation	250,000	250,000	250,000	250,000
Cash flow from operations	250,000	222,000	215,000	250,000

Year	Cash flow	PVF	PV
0	-1,030,000	1.0000	– 1,030,000.00
1	250,000	0.9091	227,272.73
2	222,000	0.8264	183,471.07
3	215,000	0.7513	161,532.68
4	280,000	0.6830	191,243.77
			–  266,479.75

 Net Present Value (in $) = -266,479.75 

b) 

No. Company should not buy new trucks.

Company should not accept this proposal because NPV is negative. It means there will be loss of $266,479.75 on purchase of new trucks given the existing circumstances.