|
Income estimations |
||
|
Year |
2017 |
2018 |
|
Net profit |
500,000.00 |
600,000.00 |
|
Dividend payout |
60.00% |
60.00% |
|
Dividend |
300,000.00 |
360,000.00 |
|
Jack Black Equity holding |
10.00% |
10.00% |
|
Dividend of Jack Black |
30,000.00 |
36,000.00 |
|
C1 (consumption in year-1) |
40,000.00 |
|
Y1 (income of year-1) |
30,000.00 |
|
Y2 (income of year-2) |
36,000.00 |
|
Capital market interest rate |
8% |
|
PV of C2 |
23,333.33 |
|
PV of Y2 |
33,333.33 |
|
C2 (consumption in year-2) |
25,200.00 |
|
((30000+33333.33)-40000)*(1.08) |
Therefore, Jack Black can consume a sum of $25200 in year-2.
|
Risk free rate of interest |
6% |
|
Market risk premium |
8% |
|
Company Name |
Expected Return |
Beta |
CAPM |
Undervalued or overvalued |
Reason |
|
Prawn Ltd |
10.80% |
0.50 |
10.00% |
Undervalued |
Expected return is higher than CAPM |
|
Salmon Ltd |
13.00% |
0.80 |
12.40% |
Undervalued |
Expected return is higher than CAPM |
|
Shark Ltd |
15.60% |
1.20 |
15.60% |
At par |
Expected return is equal to CAPM |
|
Trout Ltd |
17.40% |
1.70 |
19.60% |
Overvalued |
Expected return is lower than CAPM |
|
Market |
14.00% |
1.00 |
Figure 1: Security Market Line Chart
Present value of the constant income flows at the beginning of the sixth year
|
6th Year |
300000 |
|
Required return |
10% |
|
PV (300000/10%) |
3000000 |
Present value now of the whole income stream
|
Year |
CF |
PV |
|
|
1 |
– |
0.909 |
– |
|
2 |
– |
0.826 |
– |
|
3 |
– |
0.751 |
– |
|
4 |
120,000.00 |
0.683 |
81,961.61 |
|
5 |
220,000.00 |
0.621 |
136,602.69 |
|
6 |
3,000,000.00 |
0.564 |
1,693,421.79 |
|
Present value |
1,911,986.10 |
Existing loan details:
|
Loan |
600000 |
|
Tenure (months) |
120 |
|
Interest rate monthly |
0.60% |
|
EMI |
$7,028.51 |
|
Loan (after three years) |
462,687.16 |
|
Tenure (months) |
84 |
|
Interest rate monthly |
0.80% |
|
EMI |
$7,585.87 |
Extra period added to the term of the loan if Linda adopts the second alternative:
|
Loan |
462,687.16 |
|
Interest rate monthly |
0.80% |
|
EMI |
$7,028.51 |
|
New Tenure (months) |
94 |
|
Existing Tenure (months) |
84 |
|
Extra period |
10 |
|
Plan-A |
|||
|
Year |
Cash outflow |
PV |
|
|
0 |
100000 |
1.000 |
100,000.00 |
|
1 |
3000 |
0.917 |
2,752.29 |
|
2 |
3000 |
0.842 |
2,525.04 |
|
3 |
3000 |
0.772 |
2,316.55 |
|
Present value |
107,593.88 |
|
Plan-B |
|||
|
Year |
Cash outflow |
PV |
|
|
0 |
90000 |
1.000 |
90,000.00 |
|
1 |
8000 |
0.917 |
7,339.45 |
|
2 |
9000 |
0.842 |
7,575.12 |
|
3 |
10000 |
0.772 |
7,721.83 |
|
4 |
10000 |
0.708 |
7,084.25 |
|
Present value |
119,720.66 |
|
Annual equivalent costs (AEC) |
||
|
Plan-A |
Plan-B |
|
|
Present value |
107,593.88 |
119,720.66 |
|
Annual equivalent costs |
2.53 |
3.24 |
|
AEC |
42,505.48 |
36,954.01 |
Recommendation to William Gray:
The annual equivalent cost of Plan-B is less than Plan-A, therefore, William Gray should select Plan-B.
|
Position on 15 November, 2016 |
||
|
Bond-1 |
Bond-2 |
|
|
Face value |
100000 |
100000 |
|
Coupon (Half yearly) |
4% |
4% |
|
Maturity (Half years) |
7 |
15 |
|
15 November, 2016 to 15 May 2020 |
15 November, 2016 to 15 May 2024 |
|
|
Yield (Half yearly) |
4% |
4% |
|
Price at 15 May, 2017 |
||
|
Bond-1 |
Bond-2 |
|
|
Face value |
100,000.00 |
100,000.00 |
|
Coupon (Half yearly) |
4% |
4% |
|
Maturity (Half years) |
6 |
14 |
|
Yield (Half yearly) |
5.00% |
5.00% |
|
Interest amount |
4,000.00 |
4,000.00 |
|
Price of bond |
94,924.31 |
90,101.36 |
It could be observed that the price of bond-1 has gone down from $100,000 to $94,924.31 and the price of bond-2 has gone down from $100,000 to $90,101.36.
|
Cash outflows |
||
|
Year |
$ |
|
|
0 |
-535000 |
Cost of technology and additions to current assets |
|
1 |
0 |
|
|
2 |
-15000 |
Cost of overhauling the technology |
|
Savings lost on building |
|||
|
PV of Rent for 4 years net of tax |
84,000.00 |
3.04 |
255,137.35 |
|
Less: PV of Payment to cancel the lease |
33,000.00 |
1.00 |
33,000.00 |
|
PV of savings lost |
222,137.35 |
|
Cash inflows |
|||||
|
Year |
Labor costs Savings |
Tax savings on depreciation |
Salvage |
Recovery of current assets |
Total |
|
1 |
190,000.00 |
36,000.00 |
226,000.00 |
||
|
2 |
190,000.00 |
36,000.00 |
226,000.00 |
||
|
3 |
190,000.00 |
36,000.00 |
226,000.00 |
||
|
4 |
190,000.00 |
36,000.00 |
20,000.00 |
35,000.00 |
281,000.00 |
|
Net present value |
|||
|
Year |
Net cash flows |
PV |
|
|
0 |
-535000 |
1.0000 |
(535,000.00) |
|
1 |
226000 |
0.8929 |
201,785.71 |
|
2 |
211000 |
0.7972 |
168,207.91 |
|
3 |
226000 |
0.7118 |
160,862.34 |
|
4 |
281000 |
0.6355 |
178,580.58 |
|
PV of cash flows |
174,436.54 |
||
|
Less: PV of savings lost |
222,137.35 |
||
|
Net benefit or loss in present value terms |
(47,700.81) |
Note: The cost of fee of $27,000 paid to conduct a feasibility study has been considered to be irrelevant and hence ignored in computation of net present value.
The present value of net benefits is negative that means the company will incur loss if new technology is adopted. Therefore, it is advised that the company should not go for new technology.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
