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