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Financial management Essay Example
- Category:Finance & Accounting
- Document type:Assignment
- Level:Undergraduate
- Page:1
- Words:328
Question 1.
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joint probabilities
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Joint probability |
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risk-free rate is 10 per cent, what is
(i) the net present value
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cash flow |
cash flow |
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risk free |
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=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
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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.
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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.
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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
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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.
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Particular |
As per today |
today + centre |
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Issued shares |
@9% raised |
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Before tax and interest |
$375,000 |
$495,000 |
$495,000 |
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Debt interest |
($15,400) |
($15,400) |
($15,400) |
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new debt interest |
($64,800) |
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Before tax |
$359,600 |
$479,600 |
$414,800 |
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($107,880) |
($143,880) |
($124,440) |
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$251,720 |
$335,720 |
$290,360 |
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Preference dividends |
($140,000) |
($140,000) |
($140,000) |
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$111,720 |
$195,720 |
$150,360 |
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ordinary |
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Ordinary shares: |
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(720,000/3)= 240000+ 230000 |
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Calculation of Indifference point between two methods of financing : |
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EPS when debt is raised |
EPS new shares |
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[(EBIT*- I1)(1-t) — (fxd dvds)] / S1 |
[(EBIT*- I2)(1-t) — (Fxd dvd)] / S2 |
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[(EBIT*- 80,200)(1-0.3) — (140,000)] / 230,000 |
[(EBIT*- 15,400)(1-0.3) — (140,000)] / |
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470,000[(0.7EBIT* — 56,140 — 140,000)] |
230,000[(0.7EBIT* — 10,780 — 140,000)] |
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329,000 EBIT* — 92,185,800,000 |
161,000 EBIT* — 34,679,400,000 |
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329,000 EBIT* — 161,000 EBIT* |
92185800000 — 34,679,400,000 |
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$342,300 |
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The indifference point in EBIT is $342,300, where EPS shall be equal under both funding option |
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