You import and sell surgical gloves. Recently, prices have changed dramatically

Surgical Gloves You import and sell surgical gloves. Recently, prices have changed dramatically. Below is a record of purchases and sales of boxes of gloves for the most recent three months of this year. Date     Purchase/sale price per box (£) 4 February Received 15,000 boxes £8 15 February Sold 17,000 boxes £10 3 March Received 30,000 boxes £11 7 March Sold 35,000 boxes £13 24 March Sold 6,000 boxes £15 3 April Received 30,000 boxes £13 10 April Sold 35,000 boxes £17   You had 20,000 boxes of gloves in stock at the beginning of February, which are valued at £7.50 per box. Other business expenses amount to £7,800 per calendar month, which you pay as they arise. Required:…

Details

Pearson Ltd is financed through the following sources

Pearson Ltd is financed through the following sources:

  • Ordinary share: 100 million shares outstanding, with current market price of one share at $2.2
  • Bank loan: $100 million borrowed from ANZ bank with an interest rate of 6%  Corporate bond: Pearson’s corporate bond is currently trading at 80% of its face value. The bonds pay coupons once per annum and have a total book value of $100 million. The current yield to maturity on the bond is 8% per annum.

The risk-free rate is 3% and the market risk premium is 6%. It is estimated that Pearson has an equity beta of 1.5. Assume corporate tax rate is 30%, calculate the WACC for Pearson Ltd.

Dell Ltd has no debt outstanding, and currently has a market value

Dell Ltd has no debt outstanding, and currently has a market value of $125 million. There are three possible scenarios for the next year:

Economic condition Earnings before interest and tax (EBIT)
Strong $15 million
Normal $10 million
Weak $5 million

 

The company is considering issuing $50m of debt with 5% interest rate. Dell will use the money raised through the debt issuance to repurchase the ordinary shares. There are currently 10 million shares outstanding.

  1. Assume no tax, what are the possible outcomes for earnings per share (EPS) next year before the debt is issued?
  2. Assume Dell has issued the debt and repurchased the shares, calculate (a) again. What do you observe?

There is an opportunity to expand the existing business by purchasing a new machinery for production

Part A There is an opportunity to expand the existing business by purchasing a new machinery for production. The machinery costs $500,000 and will be depreciated on straight-line basis to zero over 5 years. If the machinery will increase the operating profit before depreciation by $150,000, $160,000, $170,000, $180,000, and $200,000 over these 5 years. What is the average accounting rate of return for the new machinery? Assume the machine is purchased with all equity and the tax rate is 30%.   Part B There are two mutually exclusive investment opportunities. The initial investment for both projects are $100,000. The first investment will generate $20,000 per year in perpetuity. The second project is expected to generate $15,000 for the first year…

Assume you want to borrow $6,000 for a period of four years

Part A Assume you want to borrow $6,000 for a period of four years. You have two choices. ANZ bank is offering to lend you the amount at 7.25% p.a.. You can also borrow from Westpac bank and will have to repay a total of $8,162.93 at the end of four years. Which bank should you go with, and what is the interest rate if you borrow from Westpac bank?   Part B Wilson Ltd has borrowed from a bank to invest in a project. The loan requires a payment of $20,000 every year for five years. The lender quoted Wilson Ltd a rate of 8.50% p.a.. How much did the bank lend to Wilson Ltd?   Part C Sarah is…

FINM7409 – Financial Management for Decision Makers

Question 1 Part A Assume you want to borrow $6,000 for a period of four years. You have two choices. ANZ bank is offering to lend you the amount at 7.25% p.a.. You can also borrow from Westpac bank and will have to repay a total of $8,162.93 at the end of four years. Which bank should you go with, and what is the interest rate if you borrow from Westpac bank?   Part B Wilson Ltd has borrowed from a bank to invest in a project. The loan requires a payment of $20,000 every year for five years. The lender quoted Wilson Ltd a rate of 8.50% p.a.. How much did the bank lend to Wilson Ltd?   Part C…

Fiona Sporty uses a purchases journal, a cash payments journal

Question 1  Fiona Sporty uses a purchases journal, a cash payments journal, a sales journal, a cash receipts journal and a general journal. Indicate in which journals the following transactions are most likely to be recorded. Purchased inventories on credit. Sales of inventory on credit. Received payment of a customer’s account. Payment of monthly rent by cheque. End of period closing entries   Question 2 Below is information about Lisa Ltd’s cash position for the month of June 2019. The general ledger Cash at Bank account had a balance of $21,200 on 31 May. The cash receipts journal showed total cash receipts of $292,704 for June. The cash payments journal showed total cash payments of $265,074 for June. The June bank…

Peakhurst Limited had the following trial balance at 1 January 2016

Question 1 Peakhurst Limited had the following trial balance at 1 January 2016: Debit $ Credit $ Cash 200 000 Accounts receivable 600 000 Inventory 700 000 Prepaid insurance 60 000 Prepaid rent 50 000 Equipment 1 000 000 Allowance for doubtful debt 20 000 Accumulated depreciation 200 000 Accounts payable 500 000 Revenue received in advance 100 000 Income tax payable 500 000 Loan 570 000 Share capital 400 000 Retained profits 320 000 2 610 000 2 610 000   You are given the following additional information for the year ended 31 December 2016: Bad debts of $8000 were written off. It was decided that allowance for doubtful debts should be 4 per cent of accounts receivable.   Required:…

South Hampton University is preparing its budget for the upcoming academic year

Question 1 South Hampton University is preparing its budget for the upcoming academic year. This is a specialised private university that charges fees for all degree courses. Currently, 30,000 students are enrolled on campus. However, the university is forecasting a 5 per cent growth in student numbers in the coming year, despite an increase in fees to $3,000 per subject. The following additional information has been gathered from an examination of university records and conversations with university managers:   South Hampton is planning to award scholarships to 200 students, which will cover their fees. The average class has 80 students, and the typical student takes 4 subjects per semester. South Hampton operates 2 semesters per year. The average academic staff salary…

Cotton On Ltd. currently has the following capital structure

Question 1 Cotton On Ltd. currently has the following capital structure: Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm’s marginal tax rate is 30%.   Required: Calculate the current price of the…

At 30 June 2019, Beta Ltd had the following deferred tax balances

Question 1 At 30 June 2019, Beta Ltd had the following deferred tax balances:   Deferred tax liability                      $18,000 Deferred tax asset                          15,000   Beta Ltd recorded a profit before tax of $80,000 for the year to 30 June 2020, which included the following items:   Depreciation expense – plant      $7,000 Doubtful debts expense                3,000 Long-service leave expense          4,000   For taxation purposes the following amounts are allowable deductions for the year to 30 June 2020:   Tax depreciation – plant               $8,000 Bad debts written off                     2,000   Depreciation rates for taxation purposes are higher than for accounting purposes. A corporate tax rate of 30% applies.   Required: Determine the taxable…