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    Fin 2002

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    Fin 2002

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    FIN 2002 (1)

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    Fin 2002

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    of 8

    Programme Code: TU910/1

    Shared with TU905/1


    Module Code: FIN 2002
    CRN: 32302C

    TECHNOLOGICAL UNIVERSITY DUBLIN


    CITY CAMPUS - AUNGIER ST

    _____________

    TU910 – BSc. Accounting


    & TU905/1
    Year 1
    ______________

    SEMESTER 2
    EXAMINATIONS 2022/23
    ______________

    Finance 1

    Internal Examiner: Dr Benjamin Lynch

    Exam Duration: 3 Hours

    Instructions:

    • Section A: COMPULSORY. You must answer Section A (Question 1).


    This section carries 40 marks.
    • Section B: Answer any THREE (3) questions from Section B. This
    section carries 60 marks.
    • Formulae are provided in the appendix
    Section A (40 Marks): Compulsory
    Question 1
    Part A
    A publicly traded tech company called Computer plc is considering which source
    of finance they should use to raise funds for an exciting investment opportunity
    with an initial investment of €200 million. The company has just paid a dividend
    of €1 per share out of Earnings per share of €3. The company’s return on equity
    is 7% while the required return of its equity holders is 5%. The company has 1
    million shares. The first option is to raise finance through a rights issue in which
    existing shareholders will be offered the opportunity to subscribe to 1 new share
    for every 3 they already own. The shares will be offered at a 10% discount.
    (a) Calculate the current share price.
    (6 Marks)
    (b) Calculate the theoretical ex-rights price for the company.
    (3 Marks)
    (c) Will this raise enough capital to cover the investment?
    (1 Marks)
    (d) Advise Computer plc as to the key differences between debt and equity
    from both the firm’s and investor’s perspective.
    (15 Marks)
    Part B
    Computer Plc decided to raise the required fund using debt financing;
    specifically, the firm issued a long-term coupon bond with a par value of €200
    million. It has a coupon of 8% which is paid semi-annually and 20 years to
    maturity.
    (a) If the yield to maturity on this bond is now 9%. What is its current price?
    (6 Marks)
    (b) If the company was to issue a new 20-year bond today, what coupon rate
    would they have to offer?
    (3 Marks)
    (c) Describe the factors that can cause the yield of a bond to change?
    (6 Marks)
    Section B (60 Marks): Answer any THREE (3) questions

    Question 2 (20 mark)


    You have been asked to advise PC Inc. which of the following two investment
    projects they should undertake. They have supplied you with the following
    information:

    Project A Project B
    Initial Investment $550 million $300 million
    R&D expenses $100 million $50 million
    Appropriate discount rate 14% 12%

    Year 1 Year 2 Year 3 Year 4


    Project A cashflows (million $) 150 305 406 300
    Project B cash flows (million $) 150 160 170 170

    a) Using the above information, undertake financial analysis of the two


    projects using the NPV and profitability index. Advise the company on the
    project they should pursue. Would the advice be different if the company
    was facing a capital constraint? Justify your advice.
    (12 Marks)
    b) Does the fact that the above projects have different discount rates impact
    your interpretation of their NPV? Briefly explain why.
    (3 Marks)
    c) There are various tools at a financial managers disposal to reduce the
    impact of forecasting error. Describe these tools and analyses their
    usefulness.
    (5 Marks)
    Question 3 (20 mark)
    Pictures plc wants you to calculate the weighted average cost of capital in order
    to assess a long-term investment project using discounted cash flow techniques.
    The finance department has assembled the following information:

    - The company has an equity Beta of 0.8, the yield on long term risk-free
    government securities is 3% and the market risk premium is estimated as
    7%. The company’s shares are currently trading at €7 per share and there
    are 1,000,000 shares outstanding.
    - The face value of the company’s debt is €2 million stemming from its one
    long term bond outstanding which is trading at a discount of 80 due to a
    recent downgrade. The coupon on the bond is 8% with a corresponding
    yield of 11.46%.
    - Corporation tax is 12.5%

    a) Calculate the weighted average cost of capital (WACC).


    (12 Marks)
    b) Discuss why the WACC is a useful measure for firms and investors.
    (8 Marks)
    Question 4 (20 mark)
    Bill works for an investment fund and is managing a portfolio consisting of shares
    in two firms, Ice-cream plc and Umbrella plc. 60% of the portfolio consists of
    shares in Ice-cream plc and 40% comprises shares in Umbrella plc.
    The forecasted returns on these shares over the coming year under three
    potential scenarios are outlined in the table below:

    scenario Probability of Ice-cream plc Umbrella plc


    scenario returns returns
    Wet year 0.33 2% 16%
    Normal 0.33 6% 4%
    year
    Sunny year 0.34 16% 1.5%

    The correlation coefficient indicating the correlation between the returns Ice-
    cream plc and Umbrella plc (ρ) is -0.82.
    Required:
    a) Calculate the expected return and standard deviation for shares in Ice-
    cream plc.
    (3 Marks)

    b) Calculate the expected return and standard deviation for shares in


    Umbrella plc.
    (3 Marks)

    c) Calculate the expected return and the standard deviation for Bill’s
    Portfolio.
    (4 Marks)

    d) The Capital asset Pricing model (CAPM) is based on the efficient market
    hypothesis. Discuss what these mean in relation to the risk-return trade
    off and diversification.
    (10 Marks)
    Question 5 (20 mark)
    A summary Income Statement and Balance Sheet for CAR plc sets out its financial
    performance and financial position as follows:
    Balance Sheet:
    2022 (€m) 2021 (€m) 2020(€m)
    ASSETS
    Non-current assets 3,400 3,200 3,000
    Current Assets
    Inventories 720 900 1,000
    Accounts Receivable (Debtors) 720 600 500
    Cash and cash equivalents 100 150 200
    Total current assets 1,540 1,650 1,700
    TOTAL ASSETS 4,940 4,850 4,700

    LIABILITIES
    Current Liabilities
    Borrowings and overdrafts 130 120 100
    Accounts Payable (Creditors) 1512 750 500
    Accrued expenses 250 400 500
    Total current liabilities 1,892 1,270 1,100

    Non-current liabilities
    Long Term Debt 1,000 1,100 1000
    Other liabilities and provisions 240 230 200
    Total non-current liabilities 1,240 1,330 1,200
    TOTAL LIABILITIES 3,132 2,600 2,300
    EQUITY
    Share capital (30,000 Ordinary 1c
    300 300
    shares) 300
    Other reserves 400 390 380
    Retained earnings 1,108 1,560 1,720
    TOTAL EQUITY 1,808 2,250 2,400
    Total Equity and Liabilities 4,940 4,850 4,700

    Share Price (€) € 0.50 € 0.90 € 1.00


    Income Statement
    2022 (€m) 2021 (€m) 2020(€m)
    Sales Revenue 7,200 6,000 5,000
    Cost of Sales 5,040 3,000 2,000
    Gross Profit 2,160 3,000 3,000
    Operating Expenses 1,440 1,200 1,000
    Operating Profit 720 1,800 2,000
    Finance cost 70 44 40
    Profit before tax 650 1,756 1,960
    Taxation @ 12.5% 81 220 245
    Profit after tax (Net income) 569 1,537 1,715

    a) Calculate the following financial ratios for 2022 and 2021:

    i. Gross profit margin


    ii. Net profit margin
    iii. Return on Capital employed
    iv. Quick (acid test) ratio
    v. PE ratio
    (10 Marks)

    b) Comment on the results computed in (a) above. (5 Marks)


    c) How is financial analysis useful and why is benchmarking such an integral
    part? (5 Marks)

    Question 6 (20 mark)


    a) Some observers say it makes no difference whether a company pays a
    dividend or not. Do you agree? Explain with reference to relevant theory.
    (10 Marks)

    b) Discuss the differences between forwards, futures and options. Use


    diagrams to illustrate your answer.
    (10 Marks)
    Formula sheet
    𝐸(𝐶𝑓 )
    NPV = ∑𝑇𝑡=1 (1+𝑘)𝑡 𝑡 – Investment
    𝑁𝑃𝑉
    Profitability Index = 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

    𝐷𝐼𝑉1
    𝑃0 =
    𝑟
    𝐷𝐼𝑉1
    𝑃0 =
    𝑟 −𝑔
    𝑔 = 𝑏 𝑥 𝑅𝑂𝐸
    N old N new
    Pex = Pcum  + Pri 
    N total N total

    𝟏 𝟏 𝑴
    𝑷=𝑪 [ − ]+
    𝒓 𝒓(𝟏+𝒓)𝒏 (𝟏+𝒓)𝒏

    𝑅𝑖 = 𝑅𝑓 + 𝛽𝑖 (𝑅𝑚 − 𝑅𝑓 )

    WACC = We re + Wd rd (1 − Tc )
    n
    E R  = P i  Ri
    i =1


    pf
    E R AB 
    = (W A  ER A ) + (WB  ERB )
    n
     =  P  (R − ER)
    2
    i i
    i =1

     AB
    pf
    = (W 2
    A ) ( )
      A2 + WB2   B2 + (2  WA  WB   A   B   AB )

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