# Financial management Essay Example

Question 1.

1. joint probabilities

 Joint probability
1. risk-free rate is 10 per cent, what is

(i) the net present value

 cash flow cash flow risk free

=0.12(-810)+0.16(-396)+ 0.12(17)+ 0.24(926)+ 0.12(1752)=595

Deviation

=0.12-(-810-595)sq+0.16-(-396-595)sq.+12-(-17-595)sq+.12-(-17-595)sq

+.24-(-926-595)sq+24-(1.339-595)sq+24-(-1752-595)sq=868

1. Standard deviation makes one to use probability distribution and to know about the risk in capital budgeting. Normal probability distribution assist in decision asking by having an idea on NPV expected values hence knowing if they will be zero or less. When more than zero or between two values, the project is not worth accepting but if less than 0.005 its worth accepting. Standardizing the difference from zero will be -595/868=-0.685. y this is approx. 0.25that one chance out of four that NPV will be zero or less.

Question 2.

1. NPV expected

=16000+20000+10000 =46000

Sd=((8000)sq+(2)(0.9)(8000)(7000)+(2)(0.8)(8000)(4000)+(7000)sq. +(2)(0.84)(7000)(4000)+4000sq.1/2.

1. Compute the expected value and standard deviation for a combination consisting of existing products plus toppings.

46000+12000=58000

Std=328,040,000+(9000)sq.+(2)(0.4)(9000)(8000)+(2)(0.2)(9000)(7000) .+(2)(0.3)(9000)(4000)=22659

1. Coefficient of for the existing project is 0.39and existing plus pudding is 0.39. Pudding line has higher variation of 0.75than than existing project. This means higher risk, low correlation with existing project and bring variation for all the products.

Question 3.

 Particular As per today today + centre Issued shares @9% raised Before tax and interest \$375,000 \$495,000 \$495,000 Debt interest (\$15,400) (\$15,400) (\$15,400) new debt interest (\$64,800) Before tax \$359,600 \$479,600 \$414,800 (\$107,880) (\$143,880) (\$124,440) \$251,720 \$335,720 \$290,360 Preference dividends (\$140,000) (\$140,000) (\$140,000) \$111,720 \$195,720 \$150,360 ordinary Ordinary shares: (720,000/3)= 240000+ 230000 Calculation of Indifference point between two methods of financing : EPS when debt is raised EPS new shares [(EBIT*- I1)(1-t) — (fxd dvds)] / S1 [(EBIT*- I2)(1-t) — (Fxd dvd)] / S2 [(EBIT*- 80,200)(1-0.3) — (140,000)] / 230,000 [(EBIT*- 15,400)(1-0.3) — (140,000)] / 470,000 470,000[(0.7EBIT* — 56,140 — 140,000)] 230,000[(0.7EBIT* — 10,780 — 140,000)] 329,000 EBIT* — 92,185,800,000 161,000 EBIT* — 34,679,400,000 329,000 EBIT* — 161,000 EBIT* 92185800000 — 34,679,400,000 \$342,300 The indifference point in EBIT is \$342,300, where EPS shall be equal under both funding option