Assignment Task
Task
Section A – You are required to attempt all questions:
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Get Help Now!1. Talando plc has excess earnings this year and decide to distribute profits to shareholders. They plan to pay a dividend of £5 in year 1 and expects this grow constantly at 2%. What does this decision indicate? Will this decision affect the share price? Talando has a discount rate of 12%, what is the share price?
2. Lolly plc. sells ice cream and assumes that weather might affect the ice cream consumption.They analysed the report from scientists who predict the weather and climate in 2022 as follows. The probability of a hot summer is 0.2. The probability of a moderately warm summer is 0.4,whereas the probability of a wet and cold summer is 0.4.If a hot summer occurs then the return on shares in the ice cream manufacturing company will be 60 per cent. If moderately warm the return will be 30 per cent, and if cold 2 per cent.What is the expected return and what are the limitations of using the expected return to forecast?
3. Fred has two mutual funds in his portfolio with different risk levels. Baillie Global generates a return of 30% and FSSA generates a return of 20%.The associate risk for Baillie Global is 10 and 20 for FSSA. The risk-free rate is 10%, which would be his choice and why?
4.The UK manufacturer of footwear,Rose plc, is considering a major investment in new product area.The estimated cash flows for this project are as follows:
The business’s cost of finance is estimate at 12 per cent.
Calculate:
a) The net present value for the project.
b) The approximate internal rate of return for the project .
c) Provide a consideration of whether or not this project should be accepted, giving a full rational for your choice.
d) Both of these methodologies allow for the “Time Value of Money”, you should provide a consideration of the meanings of this concept and explanation of its importance.
5. Rathbone Global has an equity beta value of 2, the risk-free rate is 2 per cent and the expected rate of return in the market is 6 per cent. The current share price for Rathbone is £45 and its current dividend paid out at £3.5 per share. Assuming the dividend constantly grows at 3 per cent, provide all your estimates about the return expected on shares in Rathbone assuming CAPM applies. What this valuation means for investors?
6. Dorine plc. has a current and target leverage ratio of 0.8,the long-term finance cost from loans is 16 per cent,and a cost of equity of 20 per cent.The corporation tax rate is 35 per cent.
a) What is the weighted cost of capital?
b) If the corporation tax increased to 40 per cent,would the WACC be lowered? Why?
Section B – Answer 1 (one) question from this section:
Either
A business faces number of major issues when selecting an appropriate source of finance for a new project.Critically discuss and compare the alternative sources of finance,i.e. can the finance be raised from internal sources or will it have to be raised outside the business?If finance needs to be raised externally,should it be debt or equity?
Or
‘It is in management’s interest to keep the financial gearing level as low as possible while it is in shareholders’ interest to keep it at a high level.’Discuss this statement.
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